BEST PRACTICES IN REVOLVING LOAN FUNDS FOR RURAL ... · BEST PRACTICES IN REVOLVING LOAN FUNDS FOR RURAL AFFORDABLE HOUSING. $5.00 April 2003 Housing Assistance Council 1025 Vermont

Housing Assistance Council

BEST PRACTICES INREVOLVING LOAN FUNDS

FOR RURALAFFORDABLE HOUSING

$5.00April 2003

Housing Assistance Council1025 Vermont Ave., N.W.Suite 606Washington, DC 20005202-842-8600 (voice)202-347-3441 (fax)[email protected] (e-mail)http://www.ruralhome.org (world wide web)

ISBN 1-58064-127-X

This report was prepared by Amy L. Rose and Christopher Holden of the Housing AssistanceCouncil (HAC). The work that provided the basis for this publication was supported by fundingunder Cooperative Agreement H-21292 with the U.S. Department Housing and UrbanDevelopment (HUD). Ndeye Jackson served as Government Technical Representative. Thesubstance and funding of that work are dedicated to the public. HAC is solely responsible forthe accuracy of the statements and interpretations contained in this publication and suchinterpretations do not necessarily reflect the views of the United States Government.

HAC, founded in 1971, is a nonprofit corporation that supports the development of rural low-income housing nationwide. HAC provides technical housing services, seed money loans froma revolving loan fund, housing program and policy assistance, research and demonstrationprojects, and training and information services. HAC is an equal opportunity lender.

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TABLE OF CONTENTS

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction: Trends in Community Development Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Case Study Sites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Case Study 1: Kentucky Mountain Housing Development Corporation . . . . . . . . . . . . . . . . . . . . . 10

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Fund Evolution, Challenges, and Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Policies, Procedures, and Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Future Challenges and Lessons Learned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Case Study 2: Federation of Appalachian Housing Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21


Case Study 3: Vermont Community Loan Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36


Case Study 4: The Northwest Farmworker Housing (Tri-State) Loan Fund . . . . . . . . . . . . . . . . . . 48


Conclusion and Best Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Kentucky Mountain Housing Development Corporation:The Little Fund That Could . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Federation of Appalachian Housing Enterprises:Strength Through Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Vermont Community Loan Fund:Lending Like Clockwork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

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The Northwest Farmworker Housing (Tri-State) Loan Fund:The Stealth Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Best Practices for Rural Revolving Loan Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Appendix A. Rural Revolving Loan Fund Survey Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Appendix B. Interest Credit Contract Chart, KMHDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Table of Figures and Illustrations

Table 1. Comparative Characteristics of Primarily Rural and Urban CDFIs (2000) . . . . . . . . 3Table 2. Comparative Demographic Data: Clay and Jackson Counties (1990) . . . . . . . . . . . 10Table 3. Original Sources of Capital (1980 to 1986): KMHDC . . . . . . . . . . . . . . . . . . . . . . . 12Table 4. Distribution of Funds (1980 to 1981): KMHDC . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Table 5. Annual Capital Growth Trends (FY 1996 to FY 2000): KMHDC . . . . . . . . . . . . . . . 14Table 6. Borrower Demographics (FY 2000): KMHDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Table 7. Loan Delinquency and Default Trends (FY 1996 to FY 2000): KMHDC . . . . . . . . . 17Table 8. Proportion of Self-Generated Operating Funds

(FY 1996 to FY 2000): KMHDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Table 9. Fund Balance Trends (FY 1996 to FY 2000): KMHDC . . . . . . . . . . . . . . . . . . . . . . 18Table 10a. Annual Capital Growth Trends (FY 1996 to FY 2000):

FAHE Construction Loan Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Table 10b. Annual Capital Growth Trends (FY 1996 to FY 2000):

FAHE Home Loan Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Table 11a. Loan Products, Rates, and Terms (FY 2000): FAHE Construction Loan Fund . . . . . 27Table 11b. Loan Products, Rates, and Terms (FY 2000): FAHE Home Loan Fund . . . . . . . . . . 27Table 12. Fund Results (1985 to 1998): FAHE Home Loan Fund . . . . . . . . . . . . . . . . . . . . . 28Table 13. Borrower Demographics (FY 2000): FAHE HLF and CLF . . . . . . . . . . . . . . . . . . . . 28Table 14a. Loan Delinquency and Default Trends (FY 1996 to FY 2000):

FAHE Construction Loan Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Table 14b. Loan Delinquency and Default Trends (FY 1996 to FY 2000):

FAHE Home Loan Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Table 15. Proportion of Self-Generated Operating Funds (FY 1996 to FY 2000):

FAHE Construction Loan Fund and Home Loan Fund . . . . . . . . . . . . . . . . 32Table 16a. Fund Balance Trends (FY 1996 to FY 2000): FAHE Construction Loan Fund . . . . . 32Table 16b. Fund Balance Trends (FY 1996 to FY 2000): FAHE Home Loan Fund . . . . . . . . . . 33Table 17. Original Sources of Capital (1988 to 1990): VCLF . . . . . . . . . . . . . . . . . . . . . . . . . 37Table 18. Annual Capital Growth Trends (FY 1996 to FY 2000): VCLF . . . . . . . . . . . . . . . . . 40Table 19. Loan Products, Rates, and Terms (FY 2000): VCLF . . . . . . . . . . . . . . . . . . . . . . . . 40Table 20. Borrower Demographics (FY 2000): VCLF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Table 21. Loan Delinquency and Default Trends (FY 1996 to FY 2000):

VCLF (HCF and EF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Table 22. Proportion of Self-Generated Operating Funds (FY 1996 to FY 2000): VCLF . . . . . 45Table 23. Fund Balance Trends (FY 1996 to FY 2000): VCLF . . . . . . . . . . . . . . . . . . . . . . . . 45Table 24. Tri-State Borrower Development Output (1991 to 1998) . . . . . . . . . . . . . . . . . . . 52

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Table 25. Loan Delinquency and Default Trends (FY 1996 to FY 2000): Tri-State Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Table 26. Fund Balance Trends (FY 1996 to FY 2000): Tri-State Fund . . . . . . . . . . . . . . . . . 55

Figure 1. The young homeowner’s new home, built by KMHDC . . . . . . . . . . . . . . . . . . . . . . 15Figure 2. The converted tool shed where the young homeowner’s aunt lives . . . . . . . . . . . 16Figure 3. FAHE service area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Figure 4. The AppalBanc System: A Regional Development Genealogy . . . . . . . . . . . . . . . . . 23Figure 5. “Open for Business” at FAHE’s Berea, Ky. office . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Figure 6. Life in the Northeast Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Figure 7. A six-bedroom rehabilitation in Gilman, Vt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Figure 8. Historic row houses, Ryegate, Vt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Figure 9. Future elder home-care facility, Vergennes, Vt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Figure 10. Plaza del Sol, Sunnyside, Wash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Figure 11. Mariposa Park, Yakima, Wash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Figure 12. Abbey Heights, Ore. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Housing Assistance Council 1

EXECUTIVE SUMMARY

According to the National Community Capital Association, “best practices” in the communitydevelopment lending field are the tools and strategies that best enable community developmentfinancial institutions (CDFIs) to adapt to the changing context of their work and to perform asresiliently as possible within their mission areas (Lehr 1998, v). However, what constitutes bestpractices for one CDFI may not necessarily work for another; as a result, it is necessary toexamine carefully the impact of the social and economic context of community lendingpractices.

This study provides case study analyses of four different rural revolving loan funds in order toascertain which “best practices” are the most salient in different rural contexts. The fundsexamined include the Kentucky Mountain Housing Development Corporation (KMHDC), Inc.in eastern Kentucky; the Federation of Appalachian Housing Enterprises (FAHE), which servesKentucky, Virginia, West Virginia, and Tennessee; the Vermont Community Loan Fund (VCLF),serving the state of Vermont; and the Northwest Farmworker Housing (Tri-State) Loan Fund,which covers Washington state, Oregon, and Idaho.

The study first finds that different community lending structures are appropriate to differentrural contexts. For example, the KMHDC loan fund – which provides permanent mortgagelending over a two-county area – is suited to a rural context where there are high poverty andunemployment, but low operating costs. Conversely, the VCLF model – which combines ahousing and community facilities lending program with a business development program –would be more appropriate to a rural area where there is more robust economic growth, butgreater housing affordability problems.

Second, the study outlines best practices that are common to the four case studies. Infounding a loan fund, a clearly focused mission, good technical assistance, and solid initialcapitalization are key. In structuring loan fund policies and procedures, successful funds startwith simple, user-friendly procedures, and then diversify their lending products and practicesas their funds encounter competition from other community lending groups.

In the area of risk management, all types of funds must ensure that the collateral for each loanwill cover the costs of a possible default, and delinquencies should be monitored as closely andas soon as possible. Familiarity with borrowers through in-house technical assistance (fordevelopment groups) and homebuyer education and counseling (for individuals) also helps toprevent delinquencies. Finally, the longevity of a fund can be promoted through investment ininformation technology and staff capacity, so that the fund is able to handle increasinglycomplex financing deals and reporting requirements as it grows.

The benefits and drawbacks of obtaining certification and funds from the CommunityDevelopment Financial Institutions (CDFI) Fund are also analyzed, with the conclusion thatCDFI status has been very important to the continued growth of three of the loan fundsstudied. However, CDFI award recipients also caution that any organization thinking ofpursuing CDFI certification should examine its own capacity very carefully to determine if itwill be able to handle the CDFI Fund’s substantial application and reporting requirements.

1 CDFIs are community lending institutions that are certified and funded by the federal CDFIprogram. The National Community Capital Association (NCCA) is a membership association for certifiedCDFIs. However, a large number of community lending institutions are neither CDFIs nor members of NCCA.

2 The study defines rural CDFIs as those serving primarily nonmetropolitan counties, and urbanCDFIs as those serving primarily Metropolitan Statistical Areas.

Best Practices in Rural Revolving Loan Funds2

INTRODUCTION: TRENDS IN COMMUNITY DEVELOPMENT LENDING

In the past decade, many nonprofit housing developers have begun to form their owncommunity lending institutions. These institutions are increasingly seen as a way to usefederal resources more effectively and to leverage private capital that enhances organizations’financial clout. As of April 1, 2001, the Department of the Treasury, Community DevelopmentFinancial Institutions Fund had certified 421 nonprofit and for-profit organizations as CDFIs.1 There are countless other non-certified loan funds across the country. According to a CDFIFund survey of 106 Core Component Grant awardees, from 1996 to 1998 CDFI grant recipientsaccomplished the following.

- Certified CDFIs were located in 35 states and had service areas covering all 50 states,with 62 percent of all CDFIs serving nonmetropolitan counties.

- They made $3.5 billion in community development loans and business equityinvestments.

- They financed the construction or rehabilitation of 24,885 units of housing, 94 percentof which were affordable to low-income households.

- In 1999, CDFIs provided one-on-one technical assistance to 11,110 individuals ororganizations, and classroom training to 22,876 individuals.

(Fabiani and Benjamin 2001, 1-4)

A 2000 study of the characteristics of 110 CDFIs demonstrates that certified communitydevelopment financial institutions are active in rural areas; however, rural CDFIs’ activitiesdiffer in several ways from those of their urban counterparts (Table 1).2


Table 1. Comparative Characteristics of Primarily Rural and Urban CDFIs (2000)

Rural Urban

Size

Number of CDFIs in Sample 31 59

Average Total Capital per CDFI $8,241,226 $11,353,205

Average Years Since First Loan 13 13

Average Number FTE Employees 16.9 13.7

Average Total Expenses $1,606,169 $1,848,903

% of CDFI’s Direct Financing for:

Microenterprise Loans/Investments 6.1% 1.5%

Business Loans/Investments 41.1% 11.4%

Community Services/Facilities Loans 13.1% 18.8%

Housing Loans 38.6% 68.3%

Consumer Loans 1.1% 0.0%

Finance Activities

Average Loans/Investments Outstanding $5,044,335 $7,853,984

Average Housing Loan Size $87,803 $117,858

Average # Loans Closed in 1999 49 38

Average Interest Rate on Loans 8.4% 8.3%

Average Term of Loans (months) 78.9 70.5

Financial Performance

Average % of Equity over Total Capital 47.9% 34.7%

Average Cost of Borrowed Funds 1.5% 2.1%

Average % of Self-Generated Operating Funds 69% 67%

Avg. % Borrowed Capital from Fed. Government 36.9% 3.4%

Average % Borrowed Capital from Banks/Thrifts 7.9% 58.5%

Average % Delinquencies over 90 Days 4.6% 4.3%

Source: Lipson 2000, 33-34.


While rural CDFIs tend to be comparable to urban CDFIs in terms of longevity and staff size,the rural CDFIs tend to do a lower total dollar volume of lending, make more loans, and have asmaller total pool of capital. These facts indicate that, in rural areas, CDFIs tend to do morework to generate a smaller amount of lending business. However, the rural percentage ofequity over total capital is 13 percentage points higher than the equity percentage in urbanCDFIs, and the rural 90-day delinquency rate (4.6 percent) is almost exactly equal to the urbanrate (4.3 percent). Consequently, rural CDFIs are (on average) at least as financially stable asthose in urban areas.

While urban CDFI lending activities lean much more toward housing, rural CDFIs tend to funda combination of housing and business development projects, most likely reflecting the loweraccess to conventional business development capital in rural areas (USDA ERS 1997). Thisdifference in access to mainstream capital is also reflected in the different sources of rural andurban CDFI lending capital. While urban CDFIs receive the vast majority of their lendingcapital from banks and thrifts (58.5 percent), rural CDFIs tend to get much of their lendingcapital from a combination of federal funds (36.9 percent) and foundations (35.4 percent).

As a result, rural CDFIs have many of the same capitalization practices that the “first wave”CDFIs of the 1970s did. In the 1970s, many of the first community development lendingorganizations (such as the Housing Assistance Council (HAC) and the Kentucky HighlandsInvestment Corporation) received capitalization either from the Office of EconomicOpportunity’s “Special Impact Program” or from “socially-minded individuals, churches andlocal institutions” (Moy and Okagaki 2001, 3-4). Many rural community lending groups havealso retained the structure of “first wave” CDFIs, operating as autonomous institutions thatperform all their lending functions (such as underwriting and portfolio management) in-house, rather than outsourcing these activities to other firms (Moy and Okagaki 2001, 5).

Moy and Okagaki (2001) point out that, while both rural and urban CDFIs have been slow inevolving, mainstream financial institutions have changed enormously. The small communitybanks that once dominated in rural areas have given way to large, urban-headquartered,multi-service financial institutions that are highly specialized and technologically proficient. The type of products that are offered by for-profit lending institutions has also changed, withmany banks and other institutions offering subprime lending products to consumers witheither poor credit histories or no credit histories. Thirty years ago, these same consumerswould have been shunned by most financial institutions; now they are often “reverse redlined”by lending institutions that offer easy credit on onerous (and sometimes predatory) terms(Stein 2001). As a result, while first generation community lending institutions dealt with theabsence of capital in rural areas, present-day CDFIs now have to deal with competition fromsubprime lenders.

Finally, Moy and Okagaki (2001) have observed that the missions of most CDFIs tend to leadthem toward lending activities that are inherently risky, with lower transaction efficiencies.

The primary CDFI niches tend to be: 1) products with high transaction costs; 2)customers who require a lot of handholding; and 3) capital needs which are relativelyfar out on the risk spectrum. These niches drive up CDFI expenses at a time when


CDFI’s funders expect them to be financially self-sufficient. (Moy and Okagaki 2001,10)

The dilemmas of self-sufficiency tend to be more pronounced in poor rural areas, where alarge portion of clients are “unbanked” and have low educational attainment, and wherecommunity development lenders have long distances to travel to oversee the housingdevelopment projects that they are financing.

These considerations ultimately mean that “best practices” for rural community lendinginstitutions will have to take into account the challenges of working in a rural environment. These challenges include the absence of physical infrastructure, large distances betweenlenders and borrowers, higher costs for personalized, in-house lending services, and lack ofaccess to conventional capitalization sources.

One type of lending structure, the revolving loan fund, has proven popular with rural nonprofithousing providers and regional intermediaries. For this report, HAC staff researched lendingprograms that recycle federal housing dollars (and other sources of capital) through revolvingloan funds – both CDFI-certified and non-CDFI funds. In addition to examining organizationaland administrative models, HAC conducted an analysis of the benefits and challengesassociated with utilizing federal funds for revolving loans.

Methodology

The research for this report was conducted during federal fiscal year 2001. Using data fromthe NCCA’s annual survey of its 50 member organizations and the recommendation of industryexperts, HAC staff selected four rural-serving organizations with revolving loan funds as casestudies. Case studies were selected on the basis of performance history and diversity inorganization size, target population served, and geographic service area.

HAC staff collected loan fund data on:

- mission and strategy,- market and programs,- human resources, and- finances and management information.

Case study research was conducted through a combination of staff surveys (one perorganization) and follow-up interviews with loan fund staff members, borrowers, and otherstakeholders. Survey and interview questions were based on the community developmentfinancial institution (CDFI) performance principles identified by NCCA (Lehr 1998; Gillette1994), and included the following questions. For the complete survey instrument, seeAppendix A.

- What is the history of the loan fund? How was it originally capitalized? Why was itstarted? What is the composition of its board of directors and how has that changed?


- What is the structure of the staff and the scope of its current activities? What kinds ofloan products does it offer and how have those changed?

- What social and financial performance indicators does the loan fund track over time? What have been the social and financial impacts of the loan fund?

- What are the characteristics of the loan fund’s borrowers? Does the loan fund provideeducation and counseling for borrowers? How often and under what circumstances?

- What is the percentage of loss reserves (capital set aside to cover potential losses onloans) over loan principal outstanding? What is the percentage of delinquent paymentsand defaults over loan principal outstanding? How diversified is the loan fund’sportfolio (i.e., does it have different types of loans with different levels of risk so that thelower risk loans compensate for the higher risk loans)?

- What is the annual growth in fund capitalization? What are the average number ofinvestors and average investment size each year? What are the average rates and termsof investments?

- What percentage of the loan fund’s operating budget is self-generated (i.e., funds fromfee-for-service income, prior fiscal surpluses, etc., that are not dependent on outsidesources)? What is the percentage of equity over total loan capital?

The follow-up interviews focused on the reasons behind each organization’s successes and/orchallenges and whether these challenges were specific to a particular organizational model, toworking within a rural area, or to serving populations with special housing needs. This reportconcludes with a final section that synthesizes the “best practices” from each case study site.

Case Study Sites

Racially and geographically diverse case studies were difficult to find because there are veryfew long-lived revolving loan funds in rural areas that specifically fund housing (mostspecialize in micro-business lending), and most of those funds are concentrated in theNortheast and Central Appalachia. However, the four case studies below provide a picture ofthe relative strengths and weaknesses of four different loan fund models within a ruralcontext.

The Kentucky Mountain Housing Development Corporation (KMHDC)Service Area: Clay and Jackson Counties, Southeastern Kentucky

Kentucky Mountain Housing Development Corporation (KMHDC) celebrated the twentiethanniversary of its New Home Loan Fund shortly before HAC conducted this research. The loanfund, which is not CDFI-certified, was first capitalized through contributions from churchesand individuals and later by funds from the Appalachian Regional Commission, the U.S.Department of Housing and Urban Development (HUD), and the Kentucky HousingCorporation (the state housing finance agency). Before the New Home fund was established,many of KMHDC’s clients with extremely low incomes were unable to qualify for Section 502mortgage loans from the Rural Housing Service/Rural Development, part of the U.S.Department of Agriculture (USDA).

3 Under certain conditions, all or part of the interest credit may be forgiven. The KMHDC NewHome Loan Fund is also able to write down the principal on its loans using its own capital, rather thanrelying on Section 502 loan subsidies. This capacity is extremely rare in small, local loan funds.


As of 2001, the loan fund lent over $1 million per year and had 367 active loans in its portfolio. In its 20 plus years of activity, the New Home Loan Fund – in addition to the Home RepairFund – had financed the construction or rehabilitation of almost 1,000 homes for very low-income families with an average income below $10,000 per year. The average monthlypayment for a new home financed through the loan fund is $120.

Although mortgages are written at conventional interest rates, the effective interest rates toborrowers are between 1 and 7 percent using an “interest credit contract.” Under the contract,the monthly payments that borrowers make are calculated to be affordable on a sliding scale. The remainder of the monthly payment that would have been made at an 8 percent interestrate is then “credited” to the borrower, under the condition that it will begin to be repaid uponresale of the house.3 Fundraising by KMHDC provides subsidies that reduce the cost of homeloans by an average of $13,000 per house. KMHDC also services all its loans and providescounseling to new homebuyers.

The Kentucky Mountain New Home Loan Fund is an example of a small, yet high-impactlending program that has had tremendous staying power. It is also an interesting comparisoncase to the Federation of Appalachian Housing Enterprises (FAHE, below), which is a regionalloan fund with CDFI certification and an affiliation with the NCCA. While both nonprofitsoffer similar permanent financing products, it is instructive to examine the comparativeadvantages and disadvantages of operating a large, regional fund versus a smaller, local fund.

Federation of Appalachian Housing Enterprises (FAHE) Revolving Loan FundsService Area: Kentucky, Virginia, West Virginia, and Tennessee

The original FAHE revolving loan fund was a construction loan fund capitalized in 1981 toprovide predevelopment, bridge, and construction loans to FAHE member groups. As of 2001,the construction loan fund was capitalized at $5.7 million and had lent a cumulative total of$13.5 million for 235 construction loans. During the 1980s, FAHE also created a regionalhome loan fund that was eventually split into four state-based loan funds, available toborrowers in Kentucky, Virginia, West Virginia, and Tennessee. The four funds together arecapitalized at approximately $17 million.

From 1985 to 1998, the FAHE home loan fund originated, held, and serviced 459 homepurchase or rehabilitation loans to individual families at 80 percent of median income andbelow, focusing on those with incomes below 60 percent of median. FAHE home loanpayments are usually calculated to result in the borrower paying 20 percent of his/her incomefor principal, interest, taxes, and insurance. In 1998, monthly payments for Kentucky homeloans were as low as $151. Borrowers must also provide the land on which their homes will bebuilt or a $300 downpayment, and must be able to pay some of the closing costs.


The FAHE revolving loan funds are very well known to rural housing developers, particularlythose familiar with the difficulties of development in Central Appalachia, where both povertyand rocky, mountainous terrain make homebuilding very expensive and financially risky. Their reputation is such that rural housing developers working as far away as the colonias onthe Texas-Mexico border have expressed interest in using the FAHE loan funds as a model forrevolving loans.

The Vermont Community Loan FundService Area: Vermont

The Vermont Community Loan Fund (VCLF) is a statewide community development financialinstitution (CDFI) incorporated in 1987. It was one of the first lending organizations to becertified as a CDFI, as well as one of the founding members of the National Community CapitalAssociation. The loan fund recently became the first CDFI to be approved by USDA RuralDevelopment to make guaranteed loans for community facilities throughout the state and, asof 2001, was capitalized at $8.1 million. Since 1987, VCLF has lent over $14 million to hundreds of community-based organizations andsmall businesses around the state. A portion of these loans are made to nonprofit housingdevelopers to construct perpetually affordable housing for Vermonters earning 80 percent orless of area median income. Loans may be used for bridge financing, real estate acquisition, orproperty rehabilitation. Borrowers are eligible for pre- and post-loan technical assistance withcredit counseling, information and referrals, business plan development, and proactiveproblem resolution. Since its inception, VCLF has financed approximately 1,500 units ofhousing.

VCLF’s financial management practices have contributed to its reputation for stability. Theloan fund has $2.3 million in equity, which represents 29 percent of the fund’s total assets. Theequity provides a safeguard against any losses in invested capital. This equity level is extremelyhigh, compared to the average equity in commercial banks (4 percent) or even credit unions(10 percent). Consequently, VCLF illustrates the best practices of a mature, stable loan fundserving a rural state.

The Northwest Farmworker Housing (Tri-State) Loan FundService Area: Oregon, Washington State, and Idaho

The Tri-State Fund was created in 1991 by three Northwest nonprofit organizations in order tofurther the development of decent, safe, and affordable housing for very low-income migrantfarmworkers and their families. The Community and Shelter Assistance Corporation (CASA)of Oregon, the Idaho Migrant Council (IMC), and the Office of Rural and Farmworker Housing

4 CASA of Oregon has since withdrawn from the Tri-State Fund, using its share of the fund as amatch for a CDFI grant award. In fact, CASA’s experience with the Tri-State Fund was a major factor in itsdesignation as a CDFI in 2000.


(ORFH) in Washington state cooperatively underwrote all the loans, and the NorthwestRegional Facilitators (NRF) served as fiscal agent for the fund.4

The fund was originally capitalized by a single $500,000 grant from the Northwest AreaFoundation, approximately $406,000 of which is loaned out. By 1998, the Tri-State Fund hadfinanced over 800 housing units for approximately 4,400 very low-income farmworkers(including spouses and dependents) in Washington state, Oregon, and Idaho. Tri-State fundscover predevelopment expenses such as payments on options to purchase property, land-usepermit applications, and architectural/engineering costs. Because Tri-State funds are interest-free, they have enabled many housing developments to withstand predevelopment delays andadapt quickly to changing financing requirements without losing viability. These funds havealso served as leverage for other financing applications.

Because its beneficiaries are migrant farmworkers, the Tri-State Fund serves to illustrate thelending practices necessary to deal with development obstacles such as delays due to “Not InMy Back Yard” opposition (NIMBYism) and the reduction of federal construction financingsources. It also demonstrates the enormous impact that a loan fund with neither CDFIcertification nor NCCA affiliation can have.

5 Distressed counties are defined as those with any two of the following indicators: unemploymentand poverty rates at 150 percent of the respective U.S. rates; per capita incomes under 67 percent of the U.S.per capita income; or poverty rates at 200 percent of the U.S. poverty rate.


CASE STUDY 1: KENTUCKY MOUNTAIN HOUSING DEVELOPMENTCORPORATION

Background

In 1999, the Central Appalachian region contained the highest number of AppalachianRegional Commission (ARC)-designated distressed counties, where the 1990 poverty rate (27percent) was more than twice the national average (13 percent), the 1995 per capita income($14,417) was less than 62 percent of the national average ($23,196), and the aggregate 1996unemployment rate (10.4 percent) was nearly double the national rate (5.4 percent).5 InEastern Kentucky, on the eastern edge of Central Appalachia, residents have withstood decadesof poverty and underdevelopment through a unique culture that emphasizes family ties,individual resiliency, and church involvement (HAC 1999).

In the heart of this region are Clay and Jackson counties, which comprise the service area ofthe Kentucky Mountain Housing Development Corporation, Inc. (KMHDC). As of 2000, anestimated 57 percent of renters in Clay County and 61 percent of renters in Jackson Countywere unable to afford a two-bedroom apartment at the U.S. Department of Housing and UrbanDevelopment (HUD)-determined fair market rent (NLIHC 2000). In 1990, 15.6 percent of thehousing units in Clay County and 14.8 percent of the units in Jackson County weresubstandard (HAC 1994). Data from the 1990 Census paint a picture of two counties withextremely low median incomes, high poverty rates, and many social challenges (Table 2).

Table 2. Comparative Demographic Data:Clay and Jackson Counties (1990)

County

MedianHousehold Income

% PersonsBelow

Poverty

% Persons onSSI or other

PublicAssistance

% Persons Age16-64 with a

Disability

% Persons Age25+ with HighSchool Degree

Clay $12,732 36% 55% 18% 39%

Jackson $11,885 35% 54% 14% 38%

Source: U.S. Census Bureau, State and County Quick Facts, www.census.gov.

Until the late 1980s, the primary industries for the two counties were coal processing (ClayCounty) and tobacco farming (Jackson County). However, nearly all of the coal tipples(processing plants) in Clay County had closed down as of 2001. While an electronicsmanufacturing plant in Jackson County provides opportunities for high-achieving students andarea residents, one KMHDC employee (a life-long resident) related that many young people

6 The housing programs formerly administered by the USDA Farmers Home Administration (FmHA)are now run by the USDA Rural Housing Service (RHS) and USDA Rural Development. The names are usedinterchangeably in this report, depending on historical context.


drop out of high school early and “draw” (collect social security or other public incomesupport).

Consequently, developers of low-income, affordable housing in these two counties not onlymust contend with a housing stock that is far more substandard than the national average, butthey must also be able to make that housing affordable to residents whose incomes are farlower than average. Much of the housing of choice in this area consists of mobile homes. Analysis of 1990 Census data indicates that 63 percent of owner-occupied mobile homes and72 percent of renter-occupied mobile homes in Eastern Kentucky were constructed beforeHUD’s 1976 quality control regulations went into effect (George 2000, 4).

In 1973, KMHDC was started as an outgrowth of local and national church ministries. Theorganization’s original goal was simple: to improve the housing situation of Clay and Jacksoncounty residents in any way possible. The executive director commented, “You have to startsomewhere and get a track record. . . . The very first house KMHDC built was a ‘stack sack’house. You take burlap bags filled with sand and concrete, then you wet them down. . . . Thathouse is still standing today.” From 1973 to 1980, KMHDC built and renovated 224 units ofhousing in Clay County. In the early 1980s, the group’s efforts grew into a pilot program –conducted along with other Kentucky nonprofits – to design and build a basic “warm and dry”house for area residents that would provide decent shelter while eschewing amenities requiredby the USDA Farmers Home Administration (FmHA) lending program to make the housesmarketable in the long term.6

Fund Evolution, Challenges, and Changes

At the same time that the pilot of the “warm and dry” houses was being conducted, KMHDCstaff found that many of the families who were applying for FmHA loans were unable toqualify because the loans generally were not accessible to families with incomes under $10,000per year. Consequently, in 1980, the executive director of KMHDC began to raise funds for alocal revolving loan fund for permanent mortgage lending that would be geared towardfamilies who were unable to qualify for Farmers Home loans. A considerable amount of theoriginal capital came from the United Methodist Red Bird Mission and the Church of theBrethren (Table 3). Funding from the Kentucky Housing Corporation (the state housingfinance entity) came after the loan fund’s second year of operation. According to KMHDC’sexecutive director, “Kentucky Housing made several low-interest loans to us that have made ahuge difference for the fund.”


Table 3. Original Sources of Capital (1980 to 1986): KMHDC

Source Amount Grant or Loan

Churches and Individuals $221,820 Both

HHS Office of Community Services $120,000 Grant

Appalachian Regional Commission $62,500 Grant

Kentucky Housing Corporation $295,500 Both

HUD Community Development Block Grant $233,750 Grant

Foundations $20,000 Grants

Source: Study survey.

For many potential investors, the thought of a small, local nonprofit administering apermanent mortgage loan fund in an extremely poor county seemed infeasible. During HAC’sresearch, KMHDC’s executive director commented, “If we had listened to all the naysayers, wenever would have started down that road.” The former executive director, who presided overthe initial capitalization of the fund, elaborated: “Developing a loan fund is a big, long-termcommitment. When you’re writing mortgages for 30 years, you have to be fiscally responsiblein order to be there for 30 years.”

The capital raised for the loan fund financed two different programs, the New Home Loanprogram and the Home Repair program. Table 4 shows the initial distribution of funds withinthe two programs.

Table 4. Distribution of Funds (1980 to 1981): KMHDC

New Home Loan program Home Repair program

Source Percentage Source Percentage

Community Services Admin. 5% Community Services Admin. 5%

FmHA 64% FmHA (grant/loan) 42%

ARC (Site Development) 8% ARC 5%

FmHA (Section 525) 5% FmHA (Section 525) 7%

Dept. of Labor Trainees 18% Dept. of Labor Trainees 24%

Churches/Individuals 16%

Dept. of Education 1%

Source: KMHDC archival documents.


When the loan fund was set up, most of the original technical assistance came from the localbankers who served on the board of directors. The staff also took the idea of the “interestwrite-down” contract from the FmHA – while the nominal interest rate charged for an FmHAmortgage loan was 3 percent, the actual interest rate would be computed so that it wasaffordable to the loan applicant at 20 percent of his or her gross income (as low as 1 percent). The mortgage was written at 3 percent interest, but the remaining interest was “credited” tothe borrower until resale of the home. The “interest credit contract” was written on a slidingscale, according to the borrower’s income (see Appendix B). KMHDC has continued to workwith the state USDA Rural Development office and also received ongoing technical assistancefrom the Kentucky Housing Corporation.

The fund was structured as a local fund because the size and the ease of access was veryimportant to area clients.

Our clients have immediate access to us. We can be more responsive. Being localized,we are having a major impact on these communities, and they really need it. Aregional fund has a more spread out impact. . . . The close relationship we have withour borrowers [fits] the culture where we’re located – like the fact that families oftencome in here and make their house payments in cash. We’re involved with them veryclosely. (Interview, executive director, KMHDC)

The ability of KMHDC to keep construction funds flowing to projects has also made its localstructure an advantage. The KMHDC loan officer observed, “Having that local access, weknow the money’s going to be there. We don’t have to wait six months to get approval forclosing and have our construction crews held up.”

Establishing a track record was initially a slow process. After two years of fundraising, theKMHDC loan fund finished its first house, financed by churches and individuals, on March 19,1982. The following year, the organization built two houses, gradually increasing itsproduction until, by 1992, 134 new homes had been built and 105 had been repaired.

In 1992, HUD initiated the HOME Investment Partnership Program (HOME), which waseventually “a huge coup for us,” according the executive director. KMHDC applied for andreceived status as a community housing development organization (CHDO), which made iteligible to compete for the 15 percent CHDO setaside portion of federal HOME funds in 1993. Because Kentucky requires a local match of 5 percent of the HOME funds awarded, KMHDC’sloan fund made it a strong applicant. As a HOME-funded mortgage is paid off by theborrower, the monthly payments (known as the “CHDO proceeds”) can be used to furthercapitalize an organization’s loan fund, as long as the money is used for low-income housing. In addition, CHDOs that receive HOME awards qualify for operating funds (HAC 1998). Afterthe HOME award, KMHDC also received a $1 million Community Development Block Grant(CDBG) in 1996 through the Clay County fiscal court. The infusion of HOME funds (throughthe Kentucky Housing Corporation) and CDBG funds allowed the New Home Loan program todiversify its funding sources and decrease its dependence on USDA Rural Housing Servicefunds.


However, the increased number of funding sources brought a new challenge – keeping up withnew and different sets of reporting requirements. Because each house is heavily subsidized (onthe order of $12,000 to $13,000 per house), the loan fund must put together a uniquefinancing package from a number of different sources for which each family is able to qualify.

Originally, we were putting one or two pots of money into a house. Now there’s moremoney, but in smaller amounts. Nobody wants to be a major funder. I know the 1990swere supposed to be the decade of partnerships, but it’s made the money really difficultto work with. (Interview, chief financial officer, KMHDC)

The increase in the number and complexity of reporting requirements also led to the hiring of adevelopment director and a loan officer, as well as a change in the fund’s recordkeepingpractices, with all documents being kept centrally at the Clay County office and duplicates sentto the Jackson County office as needed.

Policies, Procedures, and Indicators

Capitalization

According to the organization’s chief financial officer, the loan fund has continued to targetfederal and state pass-through funds such as HOME/CHDO and USDA RHS HousingPreservation Grant funds. It has also begun to make use of Federal Home Loan BankAffordable Housing Program funds to write down loan principals, as well as Kentucky’sAffordable Housing Trust Fund – which is funded by proceeds from the state lottery andadministered by KHC – for principal write-downs and permanent mortgage subsidies.

Table 5. Annual Capital Growth Trends (FY 1996 to FY 2000): KMHDC

Year $ Increase%

Increase

Average #New

Investors

Average Investment

SizeAverage

RateAverage

Term

FY 2000 $991,554 17% 39 $25,424 2% 21

FY 1999 $1,034,449 19% 42 $24,629 3% 23

FY 1998 $1,081,857 23% 45 $24,041 2% 23

FY 1997 $655,755 16% 39 $16,814 2% 21

FY 1996 $489,944 13% 38 $12,893 2% 21Source: Study survey.

Annual capital growth fluctuated somewhat from FY 1996 to FY 2000, with the cost of fundsheld at approximately 2 percent (Table 5). The executive director commented that, from 1990to 1995, the loan fund doubled in size, as projected by its board of directors. In addition to itscore capital, KMHDC has been able to secure interim construction loans from the KentuckyHousing Corporation and local banks at 1 to 3 percent interest rates.

7 Data from Census 2000 (SF1 files), www.census.gov/Press-Release/www/2001/tables/redist_ky.html.


Figure 1. The young homeowner’s new home, builtby KMHDC.

Loan Products

The first loan product offered by KMHDC was the New Home Loan product, with an interestrate of 1 to 10 percent (typically 2 percent) and a 20-year term. Shortly after the New HomeLoan product came out, KMHDC began to offer Home Repair loans to rehabilitate or replaceexisting substandard owner-occupied homes. The average rate for these loans is now 1percent, with terms from five to 25 years. The New Home Loan is still offered, but with interestrates from 1 to 8 percent (typically 3 percent) and terms from 20 to 30 years. In addition, as of2001, the loan fund offers Rural Development joint financing home purchase loans thatfeature interest rates from 1 to 6.5 percent (averaging 2.4 percent) and terms of 33 years.

The borrowers served by the three programs tend to mirror the demographics of Clay andJackson counties (Table 6). Although the percentage of minority borrowers may seem small,the percentage reflects Clay and Jackson counties’ small nonwhite populations (6 percent and1 percent, respectively).7

Table 6. Borrower Demographics (FY 2000): KMHDC

ProgramMinority Borrowers Female Borrowers

Low-IncomeBorrowers

# % # % # %

New Home Loan 2 1% 96 45% 215 100%

R.D. Joint Financing 1 2% 19 40% 47 100%

Home Repair 2 2% 46 41% 111 100%Source: Study survey.

KMHDC borrowers tend to be either elderly people or young adults in their early twenties. While there is a very high homeownership rate in KMHDC’s service area, the Jackson Countyoffice secretary maintained that most of the applicants that she sees are mobile home residents(who may be renters or owners) prior toreceiving a New Home Loan.

The two borrowers interviewed for this casestudy reflect these characteristics. Oneborrower was a young woman in her earlytwenties who heard about the New HomeLoan program from a relative whose housewas rehabilitated by KMHDC. According tothe executive director, most of the applicantswho come into the office hear about the loanprograms through word of mouth. Theyoung woman was able to purchase a newly


Figure 2. The converted tool shed where theyoung homeowner’s aunt lives.

built home from KMHDC that is located downthe road from her mother, her grandmother,and her aunt (who is also applying for a NewHome Loan) (Figure 1). The aunt, who isexperiencing financial distress after a divorce, isliving at the back of the grandmother’s home ina small shelter that was formerly a tool shed(Figure 2). The young woman said that theapplication process for the Home Loan was verysimple, and that the loan officer went through itwith her step by step. At the time that sheapplied, she had no prior credit record, so the

New Home Loan helped her to establish a credit rating. As a result, she was recently approvedfor a $15,000 loan with a local bank to purchase an adjoining 60-acre parcel of land at an 8percent interest rate over 10 years.

The second borrower family interviewed was an elderly couple with serious, chronic healthproblems – the husband had emphysema and the wife recently had open-heart surgery after aheart attack. Before they purchased their home, they were renting a trailer that was(according to the Jackson County office secretary) extremely dilapidated and used a coal stovefor heating. When the woman was asked if she had applied for a loan from USDA/RHS, shegrimaced and said, “Yuck!” “That was a lot of paperwork, wasn’t it?” added the executivedirector, to which the woman nodded emphatically. The woman was very happy about theirhome purchase, saying that her and her husband’s life had improved as a result. “It’s a lotbetter. It makes you feel better when you know where your money’s going. . . . There’s onepayment I don’t mind making, and that’s my mortgage payment!”

Underwriting and Portfolio Management

The underwriting process begins with the loan officer/counselor examining the applicationform to answer the following questions.

- Does the individual qualify for a USDA RHS loan? (If so, the applicant is referredthere.)

- Is the individual’s income at or below 80 percent of area median income? (If theapplicant’s income too high, he or she is referred elsewhere.)

- Will the individual’s projected income and expenses enable him or her to make amonthly mortgage payment, plus insurance and taxes?

- What is the individual’s credit history? (Credit records are obtained through Equifax,Inc.)

The underwriting process has changed only in terms of how credit history is assessed. At thebeginning of the loan fund’s history, applicants were simply asked to provide references ofprior lenders. However, staff found that applicants would occasionally leave out references forlenders with whom they had bad debt. As a result, KMHDC began using third party creditverification through Equifax, Inc. According to the chief financial officer, the change did not


affect overall delinquency rates very much, although it did succeed in weeding out “problem”cases. Applicants receive individual homebuyer counseling from KMHDC’s loan officer bothduring the application process and before the loan closing.

Once the application is underwritten by the loan officer, it is sent to a screening committee inthe county where the applicant resides for final approval. (Clay and Jackson counties haveseparate screening committees whose members consist of both residents and bankers.) Whenthe loan is closed, construction begins, and debt servicing is done through both of the countyoffices. Because 85 to 90 percent of its borrowers do not have bank accounts and bring theirmortgage payments directly to the offices in cash, it has not been feasible for KMHDC tocentralize debt servicing.

Delinquency tracking follows a four-month timeline, beginning with a letter of notification tothe borrower after the first month of delinquency. After the second month, the borrower isrequested to come into the office and work out a debt repayment schedule. The young womaninterviewed above commented that, when her home was robbed and her mortgage paymentstolen, the chief financial officer was very amenable to working out a manageable loanrepayment schedule. If a repayment plan is not worked out, the staff will request a deed in lieuof foreclosure from the borrower; however, the chief financial officer commented that they areusually open to working out a repayment plan if the borrower comes into the office. After thefourth month of delinquency, the staff will accept the deed to the house or (if no deed has beenoffered) begin foreclosure. According to the CFO, the loan fund has only had to foreclose fiveor six times over the last 20 years, and in each case, the borrower simply had not attempted tocontact the office or had moved out of the area entirely. There have also been cases where thehomeowner died without a will and there was no clear heir to the property.

From FY 1996 to FY 2000, the delinquency and default rates have held relatively constant(Table 7). KMHDC’s close relationship to its borrowers has been largely responsible formaintaining an extremely low delinquency rate (as a percentage of principal outstanding). Consequently, the group has not seen it necessary to establish a loan loss reserve, putting thecapital to use in the loan pool that would otherwise be placed in reserve.

Table 7. Loan Delinquency and Default Trends (FY 1996 to FY 2000): KMHDC

YearLoss

Reserves Delinquencies DefaultsPrincipal

Outstanding%

Delinquent

FY 2000 0 $4,762 0 $5,917,966 0.08%

FY 1999 0 $2,454 $20,665 $5,474,612 0.04%

FY 1998 0 $3,078 0 $4,783,021 0.06%

FY 1997 0 $2,995 0 $4,201,575 0.07%

FY 1996 0 $4,875 $36,912 $3,967,257 0.12%



Sustainability

The majority of KMHDC’s operating funds come from grants (Table 8). However, the pressureon the loan fund to move toward self-sufficiency has become more acute in recent years. Nonetheless, the fund’s executive director commented that, while complete self-sufficiency is agood long-term goal, in the short term it would fundamentally damage the fund’s effectiveness.

It’s not realistic to expect us to be self-sufficient, expand production, and continue toserve families with incomes as low as we do. If we were to be self-sufficient, we coulddo it by cutting our program in half and charging the families everything it costs us todo construction and operations – so we would end up serving [families with] muchhigher incomes.

The director of development added that, regarding their current clients, “We’re talking aboutpeople making $6,000 a year.”

Table 8. Proportion of Self-Generated Operating Funds(FY 1996 to FY 2000): KMHDC

Year Self-Generated Funds Grants Investments Other

FY 2000 17% 79% 1% 3%

FY 1999 13% 83% 1% 3%

FY 1998 10% 88% 0% 2%

FY 1997 13% 80% 0% 7%

FY 1996 11% 82% 0% 7%Source: Study survey.

Nonetheless, the high percentage of grant capital in its loan pool has enabled KMHDC to maintain a very robust fund balance from FY 1996 to FY 2000, ranging from 82 to 86 percentof total capital (Table 9).

Table 9. Fund Balance Trends (FY 1996 to FY 2000): KMHDC

Year Fund Equity Total Capital Percentage Equity

FY 2000 $7,158,245 $8,305,505 86%

FY 1999 $6,432,619 $7,549,113 85%

FY 1998 $5,238,041 $6,249,254 84%

FY 1997 $4,160,871 $5,052,443 82%

FY 1996 $3,763,135 $4,566,513 82%Source: Study survey.


Future Challenges and Lessons Learned

The staff of KMHDC anticipate that continuing to find sufficient funds to write downmortgages to affordable levels will be a difficult task. (The loan officer commented, “We’retalking about $500,000 in subsidies a year.”) Further complicating the task is increaseddemand for the loan fund, compounded by increasing construction job costs for theorganization. The development director predicted, “We’ll probably be seeing an increase in thedemand for services because the economy is hitting a low point and we’ll probably see moreelderly people applying.” The CFO added, “We have 200-plus people on the Clay Countywaiting list right now. We can only serve about 10 to 15 percent of that number this year.”

In the past, the fund has occasionally hit “tight spots,” according to the executive director,particularly in the early 1990s.

I remember times when we barely had enough money to finance the next house. Therewas a greater need for the loans than we were able to meet. The HOME program hasreally made the difference, plus the Housing Preservation Grant and Federal HomeLoan Bank loans to subsidize the houses.

The organization was able to survive these tight spots by hiring a development director andputting a “major effort” into fundraising. The development director now thinks that meetingthe challenge of growing demand and rising costs will require continued fundraising effortsalong with seeking a different mix of funds.

When asked what advice the organization would have for local practitioners thinking aboutsetting up a revolving loan fund, the executive director replied as follows.

Don’t take no for an answer. . . . Keep knocking on doors and be persistent. We haveto credit [our first executive director] for having the insight and persistence to step outthere and take a chance. When we had our 25th anniversary [celebration], our majorpartners were there. Some of them hadn’t invested in the initial fund and wanted toleave it to other people. But later, after we got established, they came in.

In his advice, KMHDC’s original executive director pointed to the necessity of networking. “Thecounsel we got in the beginning to establish ourselves and have a financial base was goodcounsel. A lot of nonprofits have a hard time surviving. We need to help them to be fiscallyresponsible.”

As of 2001, KMHDC had built a new office in Jackson County and was thinking aboutexpanding its service area into Owsley County which, as of the 1990 Census, had a 52 percentpoverty rate. The new Jackson County office is off a main road and has handicapped-accessible ramps. The executive director commented, “This will really increase our visibilityand our volume of business.”

In the 20 years that the KMHDC loan fund has been in operation, it has built or rehabilitatedalmost 1,000 houses in Clay and Jackson counties. The loan fund has also impacted its region


by serving as the inspiration to establish a regional loan fund based in Berea, Ky. As the nextsection will demonstrate, the regional fund – the Federation of Appalachian HousingEnterprises – took KMHDC’s lending methods and built them into a nationally recognizedprogram that covers four states in Central Appalachia.

8 The Construction Loan Fund has since changed its name to the FAHE Development Fund; however,since the change occurred in 2001, the original name will be used in this report.


Figure 3. FAHE Service Area. Source: FAHE WebSite, http://www.fahe.org.

CASE STUDY 2: FEDERATION OF APPALACHIAN HOUSING ENTERPRISES

Background

In the late 1970s, the executive director of KMHDC and the directors of other nonprofit housingorganizations in Kentucky decided that a state housing advocacy organization was needed toaddress issues that called for collective action and coalition building. The organization theyfounded – the Federation of Appalachian Housing Enterprises (FAHE) – was not originallyintended to be a community development lender. According to FAHE’s executive director, theFederation was structured according to a “classic cooperative model.” (A cooperative is anentity that is collectively governed by its member groups, which have one vote per member onits board of directors.) From 1978 to the early 1980s, FAHE member groups addressed issuessuch as advocacy for low-income housing funding in the state of Kentucky, promotion ofbuilding code enforcement, and implementation of the pilot of the “warm and dry”demonstration house (see previous section, p. 11).

The former executive director of FAHE concluded, “So it was not strange [that] in 1980, wheninterest rates began to move up . . . the groups came to us and said that this was reallyincreasing their costs.” Whereas local banks had previously allowed FAHE member groups tocarry construction charges on their books for up to 90 days without charging interest, the risein the federal prime rate forced local lumber and supplies dealers to place member groups on arevolving charge account, charging at least 18 percent interest. Consequently, the groundworkwas laid for the establishment of the first of FAHE’s two revolving loan funds, the ConstructionLoan Fund (CLF).8

Fund Evolution, Challenges, andChanges

In 1980, FAHE’s executive director wasapproached by a member of the AdrianDominican Sisters religious order who wasdoing community work in Central Appalachia. She expressed interest in loaning $30,000 tocapitalize a construction loan fund at a 3percent interest rate for three years, with aballoon payment on the principal at the end ofthe term. The executive director thought, “Wecould probably do three $10,000 loans withthat money, and it could revolve back in and beused again.” During the first three years of theloan fund, FAHE staff began to formulatepolicies and procedures, mainly using their


own insights and experience as housing developers. The fund was subsequently offered a$75,000 loan from the Christian Reform Church, which was doing missionary work in Anvil,Ky.

The construction loan fund remained at approximately $100,000 for several years.

We didn’t have any equity – it was all borrowed money. We were loaning it out at 3percent, so we didn’t have any net worth. So if we lost anything, we’d have to justfigure out how to take it out of our operating funds to pay it. . . . I was bound anddetermined not to lose the Sisters’ retirement money. (Interview, former executivedirector of FAHE)

The challenges of keeping a sound investment fund were considerable during the early years. Two loans – both to housing factories – went bad, primarily because the factories were toocapital-intensive to feasibly serve families at or below 80 percent of area median income. According to the former executive director of one of FAHE’s member groups (FrontierHousing), even a bulldozer purchased with a CLF loan that defaulted “went missing down ahollow somewhere.” The same individual also maintained, “There was a time in the early1980s when Frontier and other member groups would loan FAHE money.”

FAHE’s second loan fund – the Home Loan Fund (HLF) – was created in 1985. Like the CLF,the Home Loan Fund arose from member groups’ requests for help in dealing with federalpolicy changes that were affecting their ability to do development. By the mid-1980s, there hadbeen a number of cuts in housing programs made by the Reagan administration, and it wasbecoming much more difficult for FAHE member groups to depend on government programsfor take-out financing on their construction projects. The precedent for a regionalAppalachian development group had already been set by the Commission on Religion inAppalachia and the Human Economic Appalachian Development Corporation (Figure 4). However, KMHDC’s success in fundraising for its permanent mortgage loan fund andcompletion of several houses prompted FAHE to consider the idea of a regional permanentmortgage loan fund.

[KMHDC] was seeing the benefits of not having to rely on the federal government fortake-out financing. The need [for affordable housing] was there and the capability [tobuild it] was there, it was just the lack of affordable permanent financing that kept usfrom building houses. It limited growth and it jeopardized the status quo, because if[the construction crews] didn’t have work, you could only keep them on for so long.[KMHDC] always had the goal in mind of creating a nonprofit that could also be adependable employer. (Interview, former executive director of FAHE)

FAHE has always encouraged its member groups to have their own loan funds for the purposesof “clout and cash flow,” according to the Federation’s executive director. However, theformation of a regional permanent mortgage loan fund had several advantages.

Most importantly, a regional loan fund allows the lender and the developer to be twoseparate entities, which is ideally how it should be. It also allows us to be more


Figure 4. The AppalBanc System: A Regional Community Development Genealogy

AppalBanc is the trade name under which FAHE and its two sister financial institutions – the CentralAppalachian People’s Federal Credit Union (CAPFCU) and the Central Appalachian Community LoanFund (CACLF) – operate. The “great-grandmother” of AppalBanc was the Commission on Religion inAppalachia (CORA), which in turn founded the Human Economic Appalachian Development (HEAD)Corporation over 25 years ago as a regional nonprofit community and economic developmentcorporation.

I. When FAHE was incorporated in 1978, it was done as an initiative of HEAD, to serve as aregional low-income housing advocacy group and later, as a low-income housing developmentloan fund.

II. In 1982, HEAD chartered CAPFCU as a regional credit union and conforming lender. CAPFCUis now a member of the Federal Home Loan Bank system as well as a HUD-approved and SBA-guaranteed lender.

III. In 1987, HEAD created the HEAD Community Loan Fund, which in 2000 was renamed theCentral Appalachian Community Loan Fund. Its mission is to provide technical assistance andcredit to individuals, cooperatives, and organizations starting or expanding small businesses.

IV. Because each HEAD affiliate had its own board of directors, which created unnecessaryconfusion, AppalBanc was created in 1995 as a single umbrella organization for the threeentities to facilitate governance and marketing.

specialized and efficient in our lending. If I have one person who is paid to do [loan]servicing and nothing else, you know that person is going to have more time to focuson that area. [Finally], we can fundraise better because we have [more] volume. (Interview, executive director, FAHE)

The initial capitalization of the Home Loan Fund came from a $480,000 loan from theKentucky Housing Corporation (KHC) – the Kentucky state housing finance agency – whichgave the HLF the flexibility it needed at its founding. The way in which KHC financed the loanalso enabled FAHE to effectively repay it “from day one.”

At the time, you could buy a zero-coupon bond for a very small amount of money. Ourinitial loan from [KHC] was something like $480,000 . . . and the first draw of that loanwould be [used] to purchase this zero-coupon bond (which was about $40,000). [Thefinancing] was calculated so that, in 20 years, [the bond] would pay back the principal. (Interview, former executive director, FAHE)

After one and a half years, the director of KHC agreed to convert the loan to a grant, due toFAHE’s success in building homes and reaching families with very low incomes. According tothe executive director at the time, “That was a very important thing, because up until thatpoint, we had very little equity.”


Not only did FAHE’s success lead KHC to convert its loan to a grant, it also attracted theattention of the Virginia state housing finance agency. Eventually, FAHE signed an agreementwith the Virginia Housing Development Agency (VHDA) in 1990 for a $1.5 million, 3 percentloan, amortized over 20 years with a balloon payment at year ten. This arrangement enabledFAHE to begin permanent mortgage lending in the state of Virginia to families with incomes ofapproximately $12,000 per year. However, the balloon payment nearly sent FAHE into a crisis,because staff had not secured adequate take-out financing to make the sizeable repayment.

We were making loans to families with incomes of about $12,000 per year with nointernal source for take-out. The [balloon payment] came due, and we managed totransition 75 percent of the families to market-rate loans. The rest, we financedinternally. That was a multimillion dollar transaction. (Interview, executive director,FAHE)

According to FAHE’s former executive director, it was FAHE’s good relations with local banksin the region that helped it avert the crisis.

It occurred to me that we [were] going to have what these banks have always wanted,because these families [were] going to have at least 40 percent equity in their homes. We talked to the banks and they were more than happy to help us take out the[mortgages as the] balloon payments came due. . . . Some of the loans we hadproblems with, and we had to keep them in our own portfolio.

Because the mortgage capital investments from Kentucky and Virginia were restricted to theirrespective states, FAHE was not able to do permanent mortgage lending outside of those areasuntil the early 1990s. Beginning in 1991, the Claude Worthington Benedum Foundationenabled FAHE to expand its mortgage lending into West Virginia through a series of capitalgrants to the new West Virginia Home Loan Fund, totaling $420,000 over its first two years. At the same time, the advent of federal funding programs without geographic restrictions, suchas CDFI grants and the HUD Rural Housing and Economic Development program, enabledFAHE to put much-needed equity into its Construction Loan Fund and expand its mortgagelending program into Tennessee. FAHE staff also cite the HOME program, which began in1992, as a major breakthrough for the HLF (although the funds were restricted to use in thestates that gave FAHE HOME awards – Kentucky and Virginia).

The original technical assistance for creating the two loan funds came from “the experienceand insight of the founders,” according to FAHE’s executive director. He stated that much ofthe evolution of the organization has been through the hard lessons of trial and error: “We’re ina constant state of organized crisis. It might be what management experts these days wouldcall a chaotic environment.” In 1992, FAHE underwent a thorough peer review by theNational Community Capital Association, which gave the organization insight into what stepswere needed to build its capacity and manage its growth. FAHE has also received ongoingtechnical assistance from KHC and, indirectly, from the Housing Assistance Council. “[Ourboard president] is on [HAC’s] loan committee and after every loan committee meeting, hewould bring back the meeting packet, give it to me and say ‘Read this.’” (Interview, executivedirector, FAHE)


One outcome of the technical assistance FAHE has received has been changes in the structureof the organization in response to the changing nature of its activities.

We’re moving to an atmosphere of specialization. It’s been partly out of necessity, dueto the sheer volume and complexity of the deals that we’re doing. You can’t let justanybody service mortgages who’s read the Cliff Notes one time. There are too manylaws and regulations. (Interview, executive director, FAHE)

In addition to adding increasingly specialized staff, FAHE has also been reassessing itsinformation technology needs. Improvised forms and processes were sufficient at thebeginning of the two funds. “We did a lot of stuff on jerry-rigged spreadsheets,” according tothe past executive director. By 2001, however, the organization was investing in higher qualitysoftware and customizing its own programs to generate reports and check its work. Thechanges have enabled FAHE to move to a new stage in its organizational growth. According tothe former executive director, “One of the big hurdles that we’ve gotten over in the past twoyears is just to increase and improve our management of the fund. If we hadn’t done that, thesame opportunities would be there, but we wouldn’t have been able to manage that growth.”


Capitalization

Capitalization strategies differ for the two FAHE funds. For the Construction Loan Fund,FAHE generally asks its member groups what projects they anticipate undertaking in the nextfiscal year and how much money they anticipate receiving from the HUD Self-HelpHomeownership Opportunities Program (SHOP) and the Appalachian Regional Commission. FAHE then fundraises to cover the remainder of the money needed, approaching the mostappropriate sources for each group’s projects, depending on the combination of federal orprivate programs for which each group qualifies.

The capitalization strategy for the Home Loan Fund is generally to seek out heavily subsidizedmoney, wherever available, preferably at a 3 percent interest rate (or lower) over a term of atleast 20 years. The money that is loaned out is then marked up by an additional 2 percent(although the effective interest rate to the borrower is brought down by an interest creditcontract similar to the one KMHDC uses).

9 For FY 1998, FY 1999, and FY 2000, no information was available on the average interest rate ofnew investments to the Home Loan Fund. For FY 1996, the stated interest rate applies to new investmentsthat were made by past investors.


Table 10a. Annual Capital Growth Trends (FY 1996 to FY 2000): FAHE Construction Loan Fund

Year$

Increase%

Increase

Average #New

Investors

AverageInvestment

Size

AverageRate

AverageTerm

FY 2000 $5,065,840 136.0% 13 $224,005 3.50% 4.0

FY 1999 $2,150,461 12.0% 2 $114,980 3.75% 3.7

FY 1998 $1,920,500 37.6% 4 $131,250 3.80% 3.5

FY 1997 $1,395,500 15.8% 2 $47,500 3.80% 3.5

FY 1996 $1,205,500 NA 3 $32,500 3.80% 3.5Source: Study survey.

Table 10b. Annual Capital Growth Trends (FY 1996 to FY 2000): FAHE Home Loan Fund9

Year$

Increase%

Increase

Average #New

Investors

AverageInvestment

SizeAverage

RateAverage

TermFY 2000 $8,078,999 2.5% 1 $192,955 NA 15.1

FY 1999 $7,886,044 12.1% 2 $426,455 NA 14.9

FY 1998 $7,033,134 9.6% 0 $0 NA 14.5

FY 1997 $6,416,771 21.6% 2 $570,192 3.1% 14.5

FY 1996 $5,276,390 NA 0 $0 3.2% 14.0


While the Construction Loan Fund saw robust capital growth between 1996 and 2000 (Table10a), the Home Loan Fund grew much more unevenly (Table 10b). Not only is the HLFgrowing more slowly, it is not attracting new investors to the same degree that the CLF is. Onepossible explanation for this difference lies in the different capital needs of the two funds. TheConstruction Loan Fund typically seeks out short-term capital, whereas the Home Loan Fundmust seek out investments with much longer terms in order to do affordable mortgage lending. While investors may be willing to invest at lower interest rates for shorter terms, it usuallymuch more difficult to find those who are willing to do so for periods of 15 to 20 years.

Another possible explanation, however, could be that the FAHE mortgage loan fund is willingto take more risks to reach lower-income borrowers (see Table 14b). One of the problems ofhigher risk (and losses) is that skittish investors tend to shy away from high-risk funds and risk-hungry venture capitalists tend to demand high interest rates. FAHE’s executive directorcommented that these are calculated risks that the organization takes to remain true to itsmission.

10All four HLF loan products are for the purpose of home purchase, rehabilitation, or repair.


We could address this [situation] through policies and procedures, but it wouldinevitably come at the expense of the families. We would basically have to lend only tofamilies making [at least] $20,000 a year. What makes us unique as an organizationwould no longer exist. But that will be a point of contention for years to come.

Loan Products

The Construction Loan Fund has diversified its loan products considerably since 1981, when itoffered a simple 12-month construction loan at a 5 percent interest rate. The infusion of grantfunds from the CDFI program in the 1990s enabled FAHE to build some equity in the CLF,establish a loan loss reserve, and offer a much wider range of products. As of 2001, FAHE hadmade 235 CLF loans to its member groups, totaling $13.5 million, and leveraging an additional$25 million. Its newest product, launched in May 2001, is an Intermediary Relending Program(IRP) to provide permanent financing up to 20 years for rural multifamily projects (Table 11a).

Table 11a. Loan Products, Rates, and Terms (FY 2000):FAHE Construction Loan Fund

Product (CLF) Purpose RateTerm

(years)

Construction Single/multifamily predevelopment 6.25% 1-2

Carryover Loan on LIHTC for 10 percent carryover requirement 6.25% 1

Working Capital One-year renewable loans 6.25-7.00% 1

Mark to Market Expiring use property acquisition 6.00% 5

Bridge Loans Construction cost bridging 6.25-7.00% 2

IRP Permanent financing - multifamily housing 3%-market 20Source: Study survey.

Table 11b. Loan Products, Rates, and Terms (FY 2000):FAHE Home Loan Fund10

Product (HLF) Rate Term Notes

FAHE KY HLF 3-8% 20 years Can extend to 30 years with loan committee approvalFAHE HOME Loan 0-8% 20 years Can extend up to 40 years

FAHE WV HLF 3-8% 20 years Can extend to 30 years with loan committee approval

FAHE Virginia HLF 3-8% 20 years Can extend to 30 years with loan committee approvalSource: Study survey.

Since 1985, the HLF has expanded from a single, 20-year loan product at 1 percent interest to amulti-state product series with more flexible terms (Table 11b). The results of FAHE’smortgage lending program as of 1998 are shown in Table 12.

11 For the HLF, “borrower” indicates a borrower household and “female borrower” indicates afemale-headed household. For the CLF, “borrower” indicates a borrower organization, and “female” or“minority” borrowers indicate borrower organizations that either are headed by minorities or women, orprimarily benefit minorities or women.


Table 12. Fund Results (1985 to 1998):FAHE Home Loan Fund

State Total Lent Total LoansAverage Borrower

IncomeAverage Monthly

Payment

Kentucky $7,702,685 257 $10,605 $151

Virginia $7,774,425 163 $14,210 $281

West Virginia $572,948 39 $13,552 $180

Total $16,050,058 459Source: FAHE Annual Report, FY 1998.

FAHE has also had success in serving borrowers that benefit low-income and female-headedhouseholds (Table 13). As with KMHDC’s borrower demographics, the percentage of minorityborrowers from the Home Loan Fund may seem low, but it is actually much higher than thepercentage of minorities in FAHE’s service area population (an average of roughly 1 percent,according to the executive director). The single minority borrower group is a nonprofit headedby a group of Catholic nuns that builds housing primarily for Native Americans.

Table 13. Borrower Demographics (FY 2000):FAHE HLF and CLF11

MinorityBorrowers

FemaleBorrowers

Low-IncomeBorrowers

Loan Fund # % # % # %

Home Loan Fund 63 8% 503 64% 786 100%

Construction Loan Fund 1 3% 21 64% 33 100%



Although FAHE has a large binder detailing the underwriting policies and procedures for itstwo loan funds, the actual application process for the Construction Loan Fund is fairly simple:“Basically . . . somebody picks up the phone and tells me that they need a loan to do a project”(interview, executive director, FAHE). After the phone conversation, the loan fund directorwill consider whether the project is in the best interests of both FAHE and the member groupand, if the loan is considered appropriate, the group will be sent an application form. Becauseof the level of familiarity between FAHE staff and its member groups, many of the details ofunderwriting are already known before a group even submits a request for a loan.


CLF loans are “family” loans – I don’t have to do a skip trace [for bad credit] on thesegroups because I know them. To be a FAHE member, you have to prove the ability toconstruct a house and have an audit done. . . . We do all the site visits anyway, so wealways know what’s going on with a project. (Interview, executive director, FAHE)

Once the application form is returned, the application is evaluated by CLF staff using fourgeneral considerations:

- What is the nature of the project and the loan request?- What loan terms does the group need in order to make the project feasible?- What will FAHE’s security or collateral be? (Is there evidence that take-out funding has

been secured?)- Has the group had experience doing this type of project before?

If additional consideration is needed for an application, FAHE staff will prepare for a meetingof the FAHE loan committee via conference call. Loan committee approval is required for loanrequests that are over $75,000 (either individually or cumulatively), for loans to rescue projectsthat are stalled, for loans to groups that are not in good standing with FAHE, and for loanrequests with terms outside those set by FAHE staff. Once a loan is approved, an attorney willprepare a promissory note and other documents for closing, set a date for closing, and issue acommitment letter.

If a loan involves construction, FAHE reserves the right to inspect the project before loandisbursement. Each construction project entails inspections once the frame is erected, whenthe project is halfway completed, and after final completion. Multifamily project loans entailevidence that projects have been inspected before every draw of money from the loan fund. For loan requests of $500,000 or more, “We’ll have someone on site every two weeks, with orwithout draw, executing inspection contracts. . . . We’ll treat it as our project” (interview,executive director, FAHE).

The combination of thorough oversight and familiarity with its member groups has resulted ina default rate close to zero and a delinquency rate that has remained stable at 11 to 13 percentof principal outstanding over the past five fiscal years (Table 14a). The near-perfect defaultrecord, however, masks several “close calls.”

The CLF has never been the beneficiary of pure equity investment, so that leaves us apretty narrow margin for error. Sometimes, a loan will begin to look like it’s going bad,so we’ll scramble to fix it and spend an inordinate amount of staff time and resourcesto do so. In the end, the loan will be saved, but there will have been a cost to us. (Interview, executive director, FAHE)


Table 14a. Loan Delinquency and Default Trends (FY 1996 to FY 2000):FAHE Construction Loan Fund

YearLoss


Outstanding%

Delinquent

FY 2000 $104,643 $273,812 $0 $2,479,117 11.0%

FY 1999 $65,331 $173,652 $0 $1,409,502 12.3%FY 1998 $29,362 $174,478 $0 $1,350,978 12.9%FY 1997 $18,362 $138,931 $7,924 $1,076,985 12.9%

FY 1996 $26,286 $140,395 $0 $1,123,167 12.5%Source: Study survey.

The application and underwriting process is very different for the Home Loan Fund, primarilybecause the fund depends on a steady steam of grant money (particularly from HOME)coming into each of the states’ accounts for FAHE’s service area. When the grant money for aparticular state is released, the mortgage loan staff (which consists of two underwriters andtwo inspector/servicers) reviews the grant regulations for any changes in family qualificationsand adjust their underwriting criteria accordingly. The staff then goes through mortgage loanapplications that have been sent in by member groups or individually by potential borrowers.

The applications that pass initial underwriting are then referred for counseling, and anyproblems with each application are addressed. Before a loan application is sent for loancommittee review, the applicant must have paid off any outstanding collections, turned in allverification documents, and created a budget with counselors (all FAHE homebuyercounseling is done in-house). FAHE underwriters and loan committee members also need tosee evidence from the FAHE member group that will be building the house that they haveoutside sources in place willing to close on the loan. Loan committee conference calls are heldon an ad hoc basis, when a large enough number of borrower families are judged ready tohave their applications reviewed.

Once a loan is approved, closing is held either immediately afterward (for FAHE HLF loans) orafter construction and site inspections are conducted (for Federal Home Loan Bank andVirginia Housing Development Agency loans). According to FAHE staff, the most commonunderwriting issues are bad credit and low incomes (“$550 a month [for income] is prettycommon,” said one underwriter). Underwriting issues tend to be the same across all fourstates; however, the different area median incomes (AMIs) between states make things moredifficult for applicants in West Virginia and Kentucky (which have extremely low AMIs) than inVirginia.

FAHE’s familiarity with its member groups has not only helped in its operations of theConstruction Loan Fund, it has also helped FAHE to monitor delinquencies in its Home LoanFund. When a borrower’s loan payment does not come in on the due date, FAHE sends out anotice. After 30 days, the borrower’s name is placed on a list and distributed to the FAHEmember group that serves that area. According to FAHE’s executive director, “This helps a lot,because these [groups] know these borrowers really well, and they can say, ‘Oh I know him.


He just got laid off at the saw mill yesterday. Let me go talk to him.’ That relationship helpsbring the borrower in to work things out.” After 60 days, FAHE will begin foreclosureprocedures; however, FAHE staff will make every effort to work out an agreement with theborrower. “We will carry loans as long as 180 days if there’s justifiable cause. In fact, wedidn’t foreclose on our first house until 1992” (interview, executive director, FAHE).

Table 14b. Loan Delinquency and Default Trends (FY 1996 to FY 2000):FAHE Home Loan Fund

YearLoss


Outstanding%

Delinquent

FY 2000 $363,557 $1,758,456 $0 $14,177,544 12.4%

FY 1999 $507,091 $2,031,235 $0 $13,601,770 14.9%

FY 1998 $504,700 $1,694,978 $0 $13,014,341 13.0%

FY 1997 $451,581 $1,640,927 $0 $11,455,682 14.3%

FY 1996 $268,271 $1,508,936 $0 $7,594,003 19.9%Source: Study survey.

FAHE’s willingness to extend itself for its borrowers does, however, show up in its delinquencyfigures for the loan fund (Table 14b). Delinquencies as a percentage of principal outstandingwere as high as 20 percent in FY 1996. In addition, even though the fund has not officiallyforeclosed on any loans in the past five fiscal years, FAHE staff indicate that problem loans areoccasionally written off the books and absorbed by the fund. (Information on how many loanshave been written off was not available.) Nonetheless, FAHE’s efforts to improve its internalcapacity resulted in delinquency rates being brought down to 9.6 percent in FY 2001.

Sustainability

While FAHE is a much larger fund than KMHDC, the issue of its sustainability is just as thorny. Whereas operational funds for the CLF are pure investments, the HLF is much more grant-dependent; however, the HLF has also been able to provide a large portion of operational fundsfrom self-generated sources.

12 No data for the Home Loan Fund are available for FY 1996 and FY 1997.


Table 15. Proportion of Self-Generated Operating Funds (FY 1996 to FY 2000): FAHE Construction Loan Fund and Home Loan Fund12

Year

Self-Generated Grants Investments Other

CLF HLF CLF HLF CLF HLF CLF HLF

FY 2000 0.0% 35.5% 0.0% 34.5% 100.0% 18.0 0.0% 0.0%

FY 1999 0.0% 23.0% 0.0% 50.0% 100.0% 27.0 0.0% 0.0%

FY 1998 0.0% 49.0% 0.0% 33.0% 100.0% 30.0 0.0% 0.0%

FY 1997 0.0% NA 0.0% NA 100.0% NA 0.0% NA

FY 1996 0.0% NA 0.0% NA 100.0% NA 0.0% NASource: Study survey.

The predominance of investments in the Construction Loan Fund is also reflected in its fundbalance trends from 1996 to 2000. The percentage of equity in the fund has not risen over 5percent, and in fact hit a five year low in FY 2000 at 2.1 percent. However, the low level ofequity fits the profile of the CLF as a “quick and nimble” fund, able to take in substantialinvestments for relatively short terms, turn projects around, and revolve the money back intothe fund.

Table 16a. Fund Balance Trends (FY 1996 to FY 2000):FAHE Construction Loan Fund

Year Fund Equity Total Capital % Equity

FY 2000 $111,186 $5,177,000 2.1%

FY 1999 $97,767 $2,227,000 4.4%

FY 1998 $49,953 $1,970,452 2.5%

FY 1997 $37,362 $1,432,862 2.2%

FY 1996 $38,390 $1,243,890 3.1%


The fund balance trends for the FAHE Home Loan Fund are much more robust, with thepercentage of equity steadily increasing from 1996 to 2000, topping 50 percent in FY 2000. These figures reflect the HLF’s receipt of a sizeable amount of grant capital over its lifetime, aswell as the long-term nature of its investments.


Table 16b. Fund Balance Trends (FY 1996 to FY 2000):FAHE Home Loan Fund


FY 2000 $8,333,202 $16,412,201 51%

FY 1999 $7,106,649 $14,992,693 47%

FY 1998 $5,730,633 $12,763,767 45%

FY 1997 $4,567,880 $10,984,651 42%

FY 1996 $2,729,561 $8,005,951 34%



Many of the challenges and changes that past and present FAHE staff see on the horizonpertain to redefining FAHE’s role as a membership organization and as a lender in CentralAppalachia. After 16 years of success, the FAHE HLF is facing a new challenge – ironically,competition from its own member groups who have their own revolving capital funds.

We’re going to have to deal with the fact that our organizations have their own money. We were founded on an implied system of supply and demand. . . . The groups used tocome to us for loans, but that’s not necessarily true anymore. Some of it is just assimple as that they have a family come in, and they have a choice of making the loanthemselves or bringing [the loans] to us – and there aren’t many compelling reasons forthem to bring them to us. (Interview, executive director, FAHE)

The executive director also indicated that part of the reason that FAHE was not quite preparedfor competition with its member groups was that its activities in the area of lending andcommunity development have tended to be much less proactive than its housing advocacyactivities. In order to be more proactive in its lending activities, FAHE’s executive director feelsthat it is necessary to look at more than just housing needs in its service area.

We’re going to have to start taking capital needs of all types seriously and being moreproactive in community development. We need to start looking at communities andseeing what enterprises dovetail with housing development. If a community needs achild care center, we should be in a position to help them do that.

In addition to thinking about new types of development, FAHE may also be thinking aboutexpanding its range of development partners. Because many of FAHE’s member groups(particularly those in Kentucky) are mature organizations with their own revolving capital,FAHE is beginning to look at development needs that fall outside its member groups’ serviceareas.

There’s a lot of area that’s not really served by a housing nonprofit in Appalachia. . . . There could be a spouse-abuse shelter in an area where there isn’t a housing program.. . . They don’t want to become a housing program, so they might call us. If they’re


aware of two clients with housing needs, it doesn’t make any sense for this group to gomake an application to the HOME program or the Federal Home Loan Bank just tomake those two houses. (Interview, former executive director of FAHE)

While FAHE would still retain its ties with and governance by its member groups, it wouldexpand its services by signing memoranda of agreement with local organizations that needsmall, highly specific projects done. This type of “niche marketing” would not only increasedemand for FAHE’s products, it would save the group from having to compete with its ownmembers for lending business. In addition, FAHE has indicated a willingness to charge moreinterest on its CLF loans in order to subsidize the Home Loan Fund. The former executivedirector observed, “It’s the access to capital that is more important to [member] groups, not somuch the interest rate. If our groups get a loan from us at 7 percent and the banks areloaning at 9 percent, they’re still saving a lot of money. If we’re borrowing funds at 4 percent,we’re doing pretty well.”

Another issue that is becoming acute in FAHE’s service area is predatory lending and creditabuse: “Check cashing, credit cards, rent-to-own, subprime lending – we’ve seen more familieswith bankruptcies in the past five years than ever before. In fact, 10 year ago, these samefamilies wouldn’t have had any credit history at all” (interview, executive director, FAHE). Theincrease in the activities of “fringe” banking institutions andpredatory lenders has fed on an environment of persistentpoverty that, in some areas, has not changed substantially formore than 30 years. According to FAHE’s executive director,“The ‘boom’ of the 90s just was not realized in our area. Wecontinued to have double-digit unemployment and had noincrease in incomes. We never had an upturn.”

In order to deal with the problems associated with easy crediton predatory terms, FAHE is beginning to encourage itsmember groups to market the services of its affiliateorganizations, CAPFCU and HEAD, under the slogan “Openfor Business” (Figure 5). One group, Frontier Housing, isplanning to open a “hybrid mini-branch” of CAPFCU in itsMorehead, Ky. office. The mini-branch would be able to signpeople up for membership in the credit union, take deposits,and originate consumer loan applications for Frontier’s clientfamilies. Because CAPFCU’s field of membership wasexpanded in 2001 to include any individual who is a memberof HEAD, all a client has to do is pay a $5 HEAD membershipfee to become a member of the credit union. As the formerexecutive director of Frontier commented, “Being able to offercredit union membership would keep new homeowners from being preyed upon by low-lifeentities who draw them into unfavorable mortgage loans for consumer purchases.”

The history and evolution of the FAHE loan funds have stemmed from the enormous personalsacrifice of people who came to Central Appalachia to make a difference. Consequently, the

Figure 5. “Open for Business” atFAHE’s Berea, Ky. office.


social process by which FAHE evolved into its present form has been just as important as theofficial decisions that were made over its lifetime. The former executive director of FAHElikened the process of creating the loan funds to the process of parenting.

In my experience, there’s something about the process that you go through to make themodel that gives you the ability to operate the model. If you don’t go through that[process] . . . [the model] not only doesn’t fit well, [but] you don’t have thecompetencies of having to give birth and rear something for a long time.

When asked whether the FAHE loan funds might be replicable in other regions of the country,the executive director joked, “For the sake of the people who might be trying to do it, I hopenot.” The fitful process of birthing and rearing the FAHE loan funds – the process of workingthrough conflict to a general consensus – has nonetheless resulted in a general sense ofsolidarity among its member groups. This solidarity, in turn, makes it possible for the “modelbuilding” process to continue.

We’ve all been through this together. New groups join because they sense the collegialnature of this process and feel that, even as a new group, they’ll be treated fairly. If youcan get some of those dynamics, then I think you could replicate what we’ve done inthat sense. But if you’ve got a lot of people looking [at each other] suspiciously . . . itwon’t work. (Interview, former executive director, FAHE)


CASE STUDY 3: VERMONT COMMUNITY LOAN FUND

Background

While the state of Vermont conjures up images of quaint, picturesque farm towns and high-end ski villas, the state’s nonprofit housing developers also have to consider the housing needsof low-income rural families. According to the Vermont Community Loan Fund (VCLF)executive director, “Our poor are not as poor as the West Virginia or Mississippi poor, butfederal guidelines don’t take into account the cost of living here. Consequently, Vermontdoesn’t compete well for federal money.” The VCLF director of lending for its Housing andCommunity Facilities (HCF) fund elaborated, “In spite of high incomes, New England hasexperienced the slowest income growth rate in the country. The Central Vermont CommunityLand Trust . . . has found that the fastest growing category of homeless people is now workingfamilies.”

In addition to high housing costs, Vermont also has to contend with an aging rental housingstock and an extremely fragmented regulatory system.

The state doesn’t have a registry or inspection process for the state’s rental housingstock. There are few local zoning codes that are enforced. The state agency that codeenforcement might fall under – the Department of Labor and Industry – focuses onresidential care facilities, rather than rental housing. (Interview, director of VCLFHousing and Community Facilities Fund)

A recent study found that, out of 500 rental units inspected in Vermont, two-thirds hadsignificant code violations. St. Johnsbury, located in the highly rural northeast part of thestate, had five housing fires from 2000 to 2001 alone. However, the state has never put intoplace a regulatory body to register and inspect properties, or to fund building codeenforcement.

The problem of affordability was beginning to surface in the state in the mid-1980s, when agroup of housing development practitioners convened a conference in Plainfield, Vt. on thetopic of socially responsible investment. There were a few community development land trustsscattered around the state; however, there was no state finance infrastructure to sustain them. At the time, the New Hampshire Community Loan Fund had been in existence for ten years,and conference planners thought that the New Hampshire model might be replicable inVermont. Several of the conference attendees went on to incorporate the Vermont CommunityLoan Fund in 1987, and many of the original incorporators continue to influence state housingpolicy and programs.


The Vermont Community Loan Fund has the advantage of being specifically structured as aloan fund from its inception, with its mission “to build and strengthen Vermont communitiesby promoting more equitable access to capital.” Consequently, the organization has not had toundergo the major identity shift from nonprofit housing developer to community development


lender that KHMDC and FAHE did. The seed money for VCLF came from several foundationgrants, including a $5,000 grant from the Jacowski Family Foundation. After hiring its firstexecutive director, VCLF began fundraising and succeeded in securing a commitment from theEpiscopal Diocese of Vermont to match investments to the loan fund from its parishes orparishioners with money from a $50,000 challenge grant. According to VCLF’s chief financialofficer (CFO), “That gave us instant credibility.” The first executive director then toured thestate’s Episcopal churches to promote the loan fund and, at the end of three years, hadsucceeded in raising $200,000 from Episcopal parishes and individuals. The profile of VCLF’sinitial capital sources reflects the importance of churches and individuals (Table 17).

Table 17. Original Sources of Capital (1988 to 1990): VCLF

Source Amount Grant or Loan

Board Investments $10,000 Loans

Corporate Investments $30,000 Loans

Foundation Grants $170,000 Grants

Individuals $605,600 Both

Religious $126,605 Both

Source: Study survey and VCLF archival records.

According to VCLF’s executive director, “We started off as a housing organization. Then wegot involved in community facilities. Then we got into the business arena.” The housing,community facilities, and business funds were, at first, three separate corporations with theirown boards of directors (VCLF served as the umbrella organization). However, the executivedirector observed, “It insulated the funds, but it got very unwieldy.” Consequently, from 1999to 2001, the three corporations were consolidated into one corporation (VCLF) with twohousing funds (the Housing and Community Facilities Fund and the Enterprise Fund).

The Housing and Community Facilities Fund (HCF) provides loans for the acquisition orrehabilitation of property that will provide affordable housing or essential services for low-income state residents. The HCF’s primary borrowers are a group of 13 nonprofit communityland trusts with service areas covering two to three counties each (although the GilmanHousing Trust’s three-county service area spans 2,000 miles of Vermont’s “Northeast Kingdom”– see Figure 6). The Enterprise Fund (EF) provides access to capital for small businesses, withan emphasis on agriculture and women- and minority-owned businesses. Its two latestinitiatives – the Agrotourism Loan Program and the Child Care Initiative – recently closed loanson five on-farm tourist enterprises and nine private child-care businesses.

In June 1987, at approximately the same time that VCLF was incorporated, Vermont’s stategovernment enacted the Vermont Housing and Conservation Trust Fund Act, which createdthe nine-member Vermont Housing and Conservation Board (VHCB) and capitalized theVermont Housing and Conservation Trust Fund at $3 million. The VHCB was structured toinclude five citizen members appointed by the governor, including one representative for low-


Figure 6. Life in the Northeast Kingdom

According to local sources, state Senator GeorgeAiken was visiting the far northeastern corner ofVermont on the campaign trail in the 1940s whenhe said, “You know, this is such beautiful countryup here. It should be called the NortheastKingdom.” The Kingdom is comprised of threecounties spanning a total of 2,000 square miles,holding one-tenth of the state’s population.

According to the executive director of the GilmanHousing Trust, the Kingdom’s natural beauty ismatched by its economic distress: “The dairy farmsare imploding. . . . The major employer – amaple syrup processing plant – closed down andnow the major [economic] sector is medical. There’s a lot of outmigration of the young and ageneral population decline.”

The rental housing stock in the area is particularlyold and vulnerable to fire. However, affordablerental housing development is often stymied by thelow rents that the market will bear. The executivedirector elaborated, “Our median rent is lowenough to where we can have absolutely no debt ina project and it’s still hard to make it work.”

Finally, Gilman has to deal with the impact ofharsh, snowy Vermont winters – “How many otherareas do you know where you have to rake yourroof or you lose it?” In addition, most of the ruralcommunities of the Northeast Kingdom do nothave access to natural gas lines, so Gilman has touse more expensive propane fuel to heat the 500units of rental property it manages.

In spite of these challenges, Gilman Housing Trustis one of VCLF’s most successful borrower groups. The “fast track” development process wasinstituted specifically with Gilman in mind, andthe group will be participating in the rentalrehabilitation loan pilot for private landlords.

income Vermonters and one for farmers. Its mission was to “encourage and assist in creatingaffordable housing and in preserving the state’s agricultural land, historic properties,important natural areas and recreational lands” (Vt. Stat. Ann. tit. 10, § 15). According toVHCB staff, the most important activities of the Housing and Conservation Board are toadminister the state-funded housingprogram that covers multifamily and single-family housing, mobile home parks, andaccessibility modifications, and to provideoperating grants and technical assistance.

VCLF and VHCB both have developmentmissions; however, VCLF was structuredpurely as a loan fund, whereas VHCB is ableto offer both loans and grants. The programdirector for VHCB commented, “Since theVHCB was founded, it’s been sort of a ‘500-pound gorilla’ to VCLF because it hassubstantially more money from the state. . . . VCLF was a struggling nonprofit from thebeginning.” Although the two organizationshave an extensive working relationshipcollaborating on housing projectsthroughout the state, the existence of VHCBhas posed a perpetual challenge to VCLF tofind its own “niche” in Vermont low-incomehousing development. VCLF has met thischallenge by diversifying its lendingactivities, focusing more on constructionand gap financing for development projects(“more of an in-and-out role,” according toits executive director) and on specializedlending initiatives.

According to the CFO, the original technicalassistance for setting up the fund camesimply from “the caliber of the people puttingthis all together – people who were in andaround the [community development]industry.” Later, VCLF received ongoingtechnical assistance from the NationalCommunity Capital Association (NCCA),including a one-week peer review after thefund’s third year of operation which was,according to the CFO, “one of the best thingsit did.” As a result of NCCA’srecommendations, VCLF created a loan


monitoring committee on its board of directors and upgraded its portfolio managementpractices.

VCLF has since undergone several additional changes aimed at improving the fund’soperational capacity. The organization is hiring new staff at the paraprofessional level to assistwith the day-to-day work of loan underwriting, so that the HCF director has more time togenerate and monitor innovative development financing deals. The fund is also investing innew computer software to replace its old investment-tracking software (4D for Macintoshsystems) and integrate it with its new loan portfolio-tracking software (Nortridge for Windowssystem). VCLF staff hope that the new software will greatly ease the process of loanmonitoring and reporting for a range of government and private funders, all with differentreporting requirements (which one staff member compared to “being nibbled to death byducks.”)

While the organizational capacity of VCLF has been changing, the state development agenciesof Vermont have likewise changed. Since 1987, the state’s housing and communitydevelopment system has evolved into four entities comprising a “crazy housing system thatworks,” according to the program director of VHCB. The Department of Housing andCommunity Affairs is charged with housing policy formulation, which also includesadministering the state’s Community Development Block Grants (CDBG) funds. The VermontHousing Finance Agency, which allocates the state’s Low Income Housing Tax Credit program,also does low-income homeowner mortgage lending. The Vermont Housing Authorityadministers the state’s tenant-based voucher program; however, it does not own or operate anypublic housing in the state. The Vermont Housing and Conservation Board administers thestate’s HOME, Lead Paint, AmeriCorps, and Housing Opportunities for Persons with AIDSprograms.

While the state’s housing practitioners maintain that the state’s housing finance system hasbeen more than able to meet their needs, the fiscal picture for the future may not be asoptimistic. According to the program director for VHCB, “We have a public with a shortattention span. They think that just because the state allocated all this money to housing a fewyears ago that the housing crisis is over.”


Capitalization

While the main component of VCLF’s initial capitalization was investments from individuals, itscapitalization strategy has since shifted to individual corporate investments, which VCLF’sexecutive director calls “our bread and butter. . . . It’s the largest dollar component of the fundwith the fewest strings attached.” Additional sources of capital have included three CDFIgrants (beginning in 1996), which have enhanced VCLF’s fund equity, as well as increased itsloan loss and equity reserves. VHCB has served as a steady source of equity matching funds forCDFI grants and has also provided operating grants.

13 No dollar growth data are available for FY 1996.


Table 18. Annual Capital Growth Trends (FY 1996 to FY 2000): VCLF13

Year $ Growth % Growth# New

Investors

AverageInvestment

SizeAverage

Rate

AverageTerm

(years)

FY 2000 $2,617,930 47% 35 $50,000 3.00% 3

FY 1999 $252,147 5% 27 $28,000 2.00% 4

FY 1998 $1,020,603 24% 50 $11,000 2.25% 3

FY 1997 $756,851 21% 32 $17,500 3.00% 3

FY 1996 NA NA 46 $20,000 3.00% 2.5


VCLF’s capital growth has been fairly steady throughout the past five fiscal years, with theexception of FY 1999 (Table 18). It was during that year that the organization’s originalexecutive director resigned from the fund. According to the CFO, “That transition was verydifficult. Our production went flat for a year. I think it was a case of ‘leaving the founder.’”However, after a new executive director was hired in FY 2000, the fund more than made up forany lost progress with a growth rate over nine times that of the previous fiscal year. The CFOcommented on recent capital growth trends, “We’ve had exponential growth, and I expect thatto continue.”

Loan Products

As stated above, VCLF is in the process of diversifying its loan products in order to pursuelending niches not being tapped by other community development lenders. One of theproducts VCLF is preparing to launch is a pilot program in collaboration with the GilmanHousing Trust. The program will use USDA Intermediary Relending Program (IRP) funds toprovide 30-year, fixed-rate loans to private landlords at 1 percent interest, in order to upgradethe state’s rental housing stock. Landlords will be eligible for the loans under the conditionthat IRP funds do not constitute over 75 percent of the total funds in the project. The programwill target landlords located in the highly rural Northeast Kingdom.

Table 19. Loan Products, Rates, and Terms (FY 2000): VCLF

Product Purpose Rate Term Limit

HCF LoansNonprofit Housing and CommunityFacilities Development

7% 20 years5-yearballoon

Small Business Loans Term Loans/Lines of CreditPrime+2%

Variable

Development Capital Subordinated Business Debt 10% Variable


Figure 7. A six-bedroom rehabilitationin Gilman, Vt.

Figure 8. Historic row houses,Ryegate, Vt.


In addition to the landlord lending initiative, VCLF is increasinglyspecializing in what the HCF director calls “turnaround jump-shotrehab deals” in the Northeast Kingdom. These deals involve theGilman Housing Trust purchasing a house that has been foreclosedon or sold at auction, rehabilitating it, and quickly reselling theproperty to a low-income buyer. As of 2001, VCLF and the GilmanHousing Trust had completed six such rehabilitation deals.

One project, in the town of Gilman, is a six-bedroom house that hasbeen rehabilitated and will be rented to a family for one year, withrental payments going toward a downpayment to purchase thehouse (financed with a USDA RHS Section 502 mortgage) (Figure 7). VCLF is providing the bridge financing. A construction crewmember on the site commented, “To appreciate the job we did, you’dreally have to have seen this place before we took it over. You wouldn’t have believed it. It wasan abandoned crack house – utterly disgusting.” In spite of the extensive rehabilitation, thehouse was kept affordable through the use of minimum-risk Department of Corrections labor,who received two days of credit off their jail sentences for every day spent working on theGilman Housing Trust crew. One Gilman staff member stated that the program worksextremely well, because most of the laborers they get are highly skilled tradesmen who havebeen sentenced for driving while intoxicated. There is very little training involved, andparticipants are relieved to have their jail sentences halved.

Another rehabilitation project in Ryegate, Vt. involved a row of historical houses originally usedto house local mill workers at the turn of the twentieth century. The Gilman Housing Trustpurchased the houses and rehabilitated them with the goal of using them as rent-to-own units(Figure 8). The original financing for the project came from the Vermont Housing FinanceAgency, USDA RHS, and the Neighborhood Reinvestment Corporation. (Gilman is aNeighborWorks® Network affiliate.) However, in the middle of the rehabilitation process,Gilman discovered lead paint and asbestos in the units. The organization also discovered that,contrary to the word of the previous owner, the site had no access to local sewer lines. Gilman

applied for a $180,000 loan from VCLF to cover theadditional lead and asbestos abatement costs, as well asthe cost of putting in a septic tank. VCLF approved theloan and, in return, was granted first position on themortgage.

14 Business loan information is current as of FY 2000, and does not include the five farm-touristenterprises and nine child-care business loans closed in 2001 (see p. 35).


Figure 9. Future elder home-carefacility, Vergennes, Vt.

Table 20. Borrower Demographics (FY 2000): VCLF

Product (FY 2000)Minorities Female Low-Income

# % # % # %

HCF and EF Loans 0 0% 2 13% 16 100%


All of the borrowers or borrower groups to which VCLF lends must serve low-incomeVermonters. Out of 16 total borrowers, 13 are VCLF’s nonprofit community development landtrust borrowers, and the remaining three are business loan borrowers (Table 20). Two of thebusiness loans are to women-owned businesses, one of which is a Mexican food restaurantand the other a food manufacturing operation.14 Although VCLF did not have any minorityborrower groups or business owners at the time of this study, the state as a whole has a 96.8percent white population, with most of the racial and ethnic minorities concentrated aroundthe Burlington metropolitan area.

Many of VCLF’s projects are housing developments forelderly Vermonters, who are particularly vulnerable to thehousing price shocks that the state has undergone. In oneof the loan fund’s more innovative loans, a married couplein the town of Vergennes submitted an application tobuild a six-unit house designed as a level three elderlyhome care facility for mixed-income residents (Figure 9). The couple, who already had extensive experience incaring for elders in their own home, would live on-site inthe upstairs part of the house and the residents would liveon the ground floor. Completion was expected in October2001 and the couple was applying for a home care licensefrom the Vermont Department of Aging and Disability.


According to the director of the HCF, the lending process begins at the start of each fiscal year,when the loan fund staff draws up a schedule of seven to eight loan committee meetings forthe following year, with loan applications due three weeks prior to each meeting. The loancommittee schedule and application deadlines are then published and distributed to all theHousing and Community Facilities Fund’s current borrowers. It usually takes approximatelythree weeks to underwrite, present to the loan committee, and render credit decisions on newapplications from current borrowers, which comprise most of the loan fund’s portfolio.


Loan applications for the Housing and Community Facilities Fund are first reviewed for anymissing critical elements. “Most people don’t send the fee up front,” commented the director. “The application fee is $350, or 1 percent of the total loan, but people think that means thatthey can wait until the loan is disbursed to pay the fee. We ask for the $350 up front, and thenwe credit the difference to their account if 1 percent of their total loan would be less.” Groupswith missing materials from their application packets are then sent follow-up e-mail messagesrequesting the missing information. VCLF is also willing to accept completed VHCB loanapplication forms.

The HCF director then begins the process of underwriting and verifying all aspects of the loanpacket, assisted by a loan coordinator whose time is divided between the HCF and the EF. Thethree most important questions that the director focuses on during this process are as follows.

- What is the borrower’s mission and usage for the loan? - What are the debt, cash flow, and take-out financing source on the project? - What is the collateral?

Loan write-ups are circulated to four other staff members for proofing, after which they areedited, re-typed, and sent to the loan committee on the Thursday prior to the Wednesday loancommittee meeting. Once the loan committee meets and renders a decision, the directortypically notifies the borrower within 24 hours and sends two copies of the commitment letterwithin 48 hours, asking the borrower to sign and return one copy within 15 days of receipt.

According to the HCF director, the standard loan commitment period is 90 days. Thecommitment period can be extended by an additional 60 days at the cost of 0.5 percent of theloan amount, which is refundable on closing. The borrower can extend the commitmentperiod an additional subsequent 60 days (120 days total) for an additional 0.5 percent of theloan amount, which is not refundable. If the borrower does not close after commitment, halfof the loan application fee is refundable.

When the process moves to closing, VCLF prepares closing documents, drafts a pre-closingletter, and works with the borrower’s attorney to set up the closing. After closing, a check isusually issued to the borrower within two weeks. The loan continues to be monitored by theloan coordinator until all outstanding loan documents are received. At that point, thedocuments are recorded into standard bank file format and the loan is placed in the active,permanent loan file.

Technical assistance (TA) for VCLF HCF borrowers often comes from sources other than VCLFitself, due mainly to the level of experience that the Vermont community land trusts alreadyhave. (“They know the drill,” said the HCF director.) The TA that the loan fund does provide itscadre of land trusts is usually limited to guiding a group through specific types of projects thatit is not experienced in doing (such as tax credit deals), or trouble-shooting projects that showearly signs of distress. The land trusts receive ongoing TA from a number of other sources,with VHCB being the primary provider. One group, the Addison County Community LandTrust (ACCT), receives most of its TA and training from VHCB, in addition to the VermontHousing Managers’ Association. (ACCT owns and manages several renovated mobile home


parks.) The Gilman Housing Trust receives ongoing TA from the Neighborhood ReinvestmentCorporation and VHCB, and recently received a capacity building grant from the HousingAssistance Council.

After loan disbursement, VCLF borrowers are required to submit monthly reports of eachproject’s income-to-expense flow and quarterly reports on the status of the organization. VCLFalso requests copies of any audits or fiscal reviews that the organization has done. The CFOstated, “We’re pretty close to our borrowers. Communication is critically important. . . . Wetry to go out and visit our borrowers once every one to two years.” Loan payments aremonitored very closely, and if a payment goes even 10 days past due, the borrower group willreceive a phone call from the loan coordinator. If the payment runs 30 days past due, theborrower receives a call from the HCF director. According to the director, there is only onedelinquency in the portfolio at present. “Technically they’re 60 days late, but we’re working ona six-month deferral for their loan.”

Table 21. Loan Delinquency and Default Trends (FY 1996 to FY 2000):VCLF (HCF and EF)

YearLoss


Outstanding % Delinquent

FY 2000 $518,860 $413,571 $37,499 $6,104,421 6.77%

FY 1999 $395,900 $97,738 $38,948 $4,177,693 2.34%

FY 1998 $279,000 $42,340 $0 $3,151,858 1.34%

FY 1997 $222,500 $23,747 $0 $2,718,920 0.87%

FY 1996 $200,000 $711 $132,823 $2,755,670 0.03%


The loan fund’s delinquency and default record from 1996 to 2000 reflects far more on theEnterprise Fund than on the Housing and Community Facilities Fund (Table 21). The EF hasmuch higher delinquency and default rates than its sister fund because the business loans areriskier and more susceptible to economic downturns than the housing loans (although thebusiness loans also earn greater returns). According to the HCF director, there has only beenone foreclosure in the Housing and Community Facilities portfolio in its 14-year history. “Itwas a rough deal,” the director related, “You never want to go through that process, but onceyou have to, you need to go in there like you mean business.”

Sustainability

In 1998, VCLF asked the NCCA to do another peer review in order to look at ways of becomingmore self-sustaining because, as the CFO stated, “For a long time, we were spending a lot oftime trying to raise operating funds.” The NCCA studied the methods that other loan fundswere using to increase their self-generated income and made the following recommendationsto VCLF.


- Charge higher interest rates on housing loans to borrower groups.- Obtain more income from CDFI program grants.- Increase growth in the Enterprise Fund.- Decrease personnel expenses.

As Table 22 demonstrates, VCLF has since raised its percentage of self-generated operatingfunds from a low of 50 percent in FY 1997 to 77 percent in FY 2000.

Table 22. Proportion of Self-Generated Operating Funds (FY 1996 to FY 2000):VCLF

YearSelf-

Generated Grants Investments Other

FY 2000 77% 23% 0% 0%

FY 1999 67% 33% 0% 0%

FY 1998 56% 44% 0% 0%

FY 1997 50% 50% 0% 0%

FY 1996 59% 41% 0% 0%


VCLF’s success at generating its own operating funds has provoked a new question, however: “Since then, we’ve had the discussion of ‘Are we being too self-sufficient? Are we not takingenough risk?’ That’s a good discussion to be having, because if we’re too self-sufficient andwe’re not taking risks, then we’re not reaching the people we need to be reaching” (interview,CFO, VCLF). This concern was echoed by the fund’s executive director: “We’re now in the 70to 75 percent range [of self-generated funds]. I don’t think we want to get much beyond that,because then we’ll be a bank.”

Table 23. Fund Balance Trends (FY 1996 to FY 2000): VCLF

YearFund

EquityTotal

Capital % Equity

FY 2000 $2,340,880 $8,176,158 29%

FY 1999 $1,594,297 $5,558,228 29%

FY 1998 $1,584,625 $5,306,081 30%

FY 1997 $1,132,884 $4,285,478 26%

FY 1996 $801,175 $3,528,627 23%


From FY 1996 to FY 2000, the rate of equity growth in the fund gradually increased, levelingout at 29 to 30 percent per year (Table 23). The solid growth in equity has been partlyattributed to the fund’s redoubling its efforts to build its Housing and Community Facilities


portfolio, which has served as the anchor for the organization and enabled it to withstand anylosses from the Enterprise Fund portfolio. The other factor in equity growth has been thefund’s CDFI status.

The biggest benefit of becoming a CDFI is money, hands down. It’s the biggest sourceof capital out there and it’s the best type of capital – unrestricted. Its sole purpose is toincrease the capacity of a CDFI in any way. They’re not segregated funds, they’re forthe whole organization. (Interview, CFO, VCLF)

However, applying for the CDFI grant and administering it have been extremely taxing. TheCFO commented, “You have to have the capacity to go through that process. It’s a bigapplication with big planning elements. But if you are ready to take that step, I’d say jump onit.”


When asked what challenges he anticipated in the future for VCLF, the loan fund’s executivedirector replied, “The first big challenge will be attracting lending capital, because our projectsare getting bigger. We tend to be better at getting money out the door than we are at getting itin.” This challenge is compounded by the fact that VCLF has never been the recipient ofsubstantial state budget allocations, and state Community Development Block Grant money isdistributed first to individual communities, and then to individual projects – “So where’s thatnew $2 to $3 million of lending capital going to come from?” the executive director asked. However, once lending capital has been secured, tracking and retaining it is also a challenge.

Usually, about 80 percent of [our investors] will renew with us. But it only takes acouple pulling out to upset the apple cart. We always have to look carefully at theavailability of lending capital. We tend to run lean and put that money to work, whichis what your investors want to see. (Interview, executive director, VCLF)

At the other end of the fiscal cycle, the balance between increasing capacity and maintainingoperational self-sufficiency may be impacted by staffing changes. The CFO commented in2001, “This year, we’re adding two new staff, which will increase our staff size by 25 percent,so we need to watch our expenses.” Sustainability was also impacted by the 2001 economicrecession, which the CFO predicted would directly impact the earnings of VCLF’s EnterpriseFund portfolio.

Last, the above challenges take place within the context of a housing affordability crisis thatshows no immediate signs of abating, in spite of the recession. According to the CFO,“Nonprofit developers can’t develop fast enough to keep up with the demand. We’re losingground by about 2,500 units a year. Housing prices average about $185,000 to $225,000 fornew houses, but [households earning] the median income in Vermont can only afford$130,000.” Affordability problems are even worse for renters. As of 2000, 48 percent of allVermont renters were unable to afford a two-bedroom unit at fair market rents (NLIHC 2000,346).


When asked what advice they would have for housing practitioners thinking of setting up astate community loan fund, VCLF staff emphasized the importance of technical assistance andthe state political context. The CFO stressed the importance of the National CommunityCapital Association as a resource. “They’ve got the technical assistance, whether it’s in theform of a consultant or best practices.” The executive director advised examining what loanfunds already exist in the area.

There are tons of loan funds and CDFIs out there. Look hard at what’s out therealready. Is there any way to piggyback or join organizations? Then look at . . . whatpart of community development you’re going to do. Don’t try to do everything.

The second consideration in setting up a loan fund pertains to the political and fiscal structureof the state in which it will be located. According to the CFO, “The state has to have a centralpivot point for [supporting] affordable housing, and if it’s not there, then you have to thinkabout how and whether you can establish it.” For example, the state of New Hampshire doesnot have an entity like the Vermont Housing and Conservation Board that does extensivetechnical assistance and operational support for state nonprofit developers. Consequently, theNew Hampshire Community Loan Fund provides much more technical assistance to itsborrower groups than VCLF does.

The CFO also pointed out that Vermont is fortunate to have a cadre of highly experiencednonprofit developers to make up its housing delivery system, including five of the largestcommunity land trusts in the country. “What happens if you don’t have that cadre in yourstate?”


CASE STUDY 4: THE NORTHWEST FARMWORKER HOUSING (TRI-STATE) LOANFUND

Background

The farm fields, orchards, and plant nurseries of Washington and Oregon are home to many ofAmerica’s favorite harvests. Red apples, strawberries, raspberries, and cucumbers are only afew of the crops that make their way from these two states to supermarkets around thecountry. However, these crops are also very labor intensive with typically short harvestseasons, resulting in extremely low incomes and irregular work for the migrant farmworkerswho harvest them.

Prior to 2001, there have been few national surveys addressing the quality of life and housingconditions of America’s migrant farmworkers. The data available up until that year paint thefollowing picture.

- In 1994, 670,000 out of a total 2.5 million farmworkers were migrant workers. Whencounted along with their dependents living in the U.S., the migrant farmworkerpopulation totaled 1,080,000.

- Eighty-five percent of all migrant farmworkers were born abroad, with the majority ofthem (90 percent) coming from Latin America.

- Foreign-based migrants made up 71 percent of the migrant labor force, representing480,000 workers.

- U.S.-based migrants made up 29 percent of the migrant labor force, comprising 190,000workers.

- The median income for migrant farmworkers was $5,000 per year.- Two-thirds of migrant farmworkers lived below the poverty line as a result of

inadequate full-time and year-round work, combined with low wages.(U.S. Department of Labor 1994)

In 2001, the Housing Assistance Council released No Refuge from the Fields, the first nationalsurvey to focus explicitly on the housing conditions of migrant farmworkers. The study foundthe following conditions in the Western migrant stream, which includes California,Washington State, Oregon, and Idaho.

- Of the three migrant streams examined, the Western stream had the highest percentageof cost-burdened households, with 42.9 percent of surveyed households in Californiaand 45.8 percent of surveyed households in Washington, Oregon, and Idaho paying 30percent or more of their monthly incomes for housing-related expenses (HAC 2001, 31).

- Among states included in the study, Washington and Oregon had (respectively) thethird and fourth highest percentages of substandard migrant farmworker housing unitswith children present. In Washington state, 30.5 percent of all units surveyed (N=129)were severely substandard and 94.9 percent of those units had children present. In

15 The study classified units as “severely substandard” that lacked complete indoor plumbing and/orhad a substantial number of interior and exterior problems.


Oregon, 34.5 percent of all units surveyed (N=209) were severely substandard, and86.6 percent of those had children present (HAC 2001, 46).15

There are many challenges to providing decent and affordable housing for migrantfarmworkers. Low farmworker incomes and brief occupancy periods during the harvestseason prevent many farmworkers and their families from obtaining off-farm rental housingthat is not employer-owned – and only 32 percent of farmworkers surveyed in 1994 and 1995were able to obtain employer-owned housing. Additional obstacles to farmworker housingdevelopment include:

- difficulty packaging financially viable projects to serve renters with especially lowincomes and short occupancy periods;

- lack of subsidized funds for farm labor housing projects;- difficulty finding and securing land with appropriate zoning and access to roads, water,

sewer, and other utilities in agricultural areas;- community opposition to new construction of farm labor housing (NIMBYism) and

widespread discrimination against farmworkers and their families based onrace/ethnicity and national origin.

(HAC 1997, 35)

In 1991, staff from the nonprofit Office of Rural and Farmworker Housing (ORFH) inWashington state, the Community and Shelter Assistance Corporation (CASA) of Oregon, andthe Idaho Migrant Council (IMC) met to discuss the chronic shortage of decent and affordablefarmworker housing in their states. They eventually decided to apply for a grant from theNorthwest Area Foundation (NWAF) to set up a three-state regional fund for predevelopmentand bridge financing for migrant farmworker housing developments. All three grantapplicants were, themselves, successful nonprofit farmworker housing developers in theirrespective states.

The concept of a regional fund appealed to the founders for several reasons. The collaborationacross states of organizations involved in similar work was appealing to the NWAF because thethree partners could share their experiences and reinforce each others’ efforts. A regional fundwould also provide for greater development production volume, because the threeorganizations could more efficiently reach more project sponsors together than they could ifacting separately. The executive director of CASA also pointed out that the very nature ofmigrant farm work itself was conducive to a regional approach, “since migrant farmworkerswill often work their way through Oregon, Washington, and Idaho, following different cropharvests.”



The three organizations were awarded a $500,000 grant from the NWAF, which coveredcapitalization ($450,000) and administration ($50,000) of the Northwest Farmworker HousingLoan Fund, more commonly known as the Tri-State Fund. In addition, ORFH had $90,000 inreceived capital of its own that it had already been using for predevelopment lending inWashington state.

Relying on their own extensive experience in the area of farmworker housing development, thefounding partners created a very simple – yet highly unorthodox – lending model (there was nooutside technical assistance in either setting up the fund or, later, in administering it). Thefund is structured as an unincorporated partnership between the three groups, with no staff ofits own. Fiscal management for the fund is provided by Northwest Regional Facilitators(NRF), a nonprofit organization supporting housing and community services throughout theNorthwest. However, all underwriting and general management of the fund is providedcollaboratively by the staff of ORFH, CASA, and IMC. During its lifetime, the fund has neverhired any staff for specialized lending positions. Borrower organizations face minimalapplication paperwork and no application fees. There has also been no change in the Tri-StateFund’s overall structure, policies, and procedures since its inception.

However, the fund has been impacted by congressional budget trends in the USDA RHS Section514/516 program, on which area nonprofits had previously relied for take-out financing. From 1991 to 1998, the Section 514/516 program experienced a surge in demand fromfarmworker housing developers across the country (particularly in the tri-state area),combined with insufficient appropriations to meet the demand. According to the Tri-StateFund’s final report, this shortage of funding resulted in a national backlog that was eventually“equal to about six years’ appropriations” (Tri-State 1998, 2). Although the Tri-State Fund wasinitially conceived as a predevelopment fund, the backlog in Section 514/516 processing meantthat farmworker housing developers in the region had to shift to other sources of take-outfinancing for their projects to survive. Consequently, the Tri-State Fund began to offer bridgefinancing to organizations that were applying for funds such as the Low Income Housing TaxCredit, so that borrower groups would be able to retain options on development property whilethey were waiting to secure alternative take-out sources.


Fund Capitalization

Throughout its history, the Tri-State Loan Fund has – surprisingly – not pursued any additionalcapitalization other than its organizing grant from the Northwest Area Foundation. Whilepursuing additional capital was originally one of the goals of the founders, two mainconsiderations led them to focus their energies elsewhere. The primary reason was that the“collapse” of the Section 514/516 pipeline meant that staff in the three organizations had torefocus their time on complex restructuring of development deals that had previously relied onSection 514/516 funding. According to the executive director of ORFH, “The Tri-State partners


Figure 10. Plaza del Sol, Sunnydale,Wash.

decided to prioritize their housing development work to keep these projects viable, rather thandevote valuable staff time of their developers to seek loan fund investments.”

A second consideration was that, even if the Tri-State partners had decided to pursueadditional investments, the level of competition for community development capital hadgrown. “Shortly after the Tri-State [Fund] was established, other predevelopment loan fundsfor affordable housing became available,” according to ORFH’s executive director. Because ofthe level of competition, the partners decided that it would not be worth the additional stafftime and energy to put together competitive applications. In addition, the executive directoradded, “the Tri-State [Fund], as it was constituted, more than met the needs of the partnergroups.”

Loan Products

The $450,000 in capitalization funds are split into three different accounts, with $150,000available to each participating agency (ORFH, CASA, and IMC) to lend out to farmworkerhousing development projects. The loans are all available at zero percent interest financing,with no set terms and repayment due upon receipt of take-out financing from a permanentsource. This kind of flexibility, while highly unusual, has been critical to the types of projectsthat Tri-State has funded.

Flexibility of loan terms has been important to Tri-Stateborrowers in part because of the obstacles posed by NIMBYopposition. Some farmworker developments have had towithstand multiple legal and regulatory challenges byneighbors before they were able to begin construction. Inone instance, the sponsors of the Plaza del Sol complex inSunnyside, Wash. had to weather two months of publichearings over a challenge to the Conditional Use Permit(CUP) application that would have enabled the developer tobuild fourplexes, rather than duplexes, on the site. Thedeveloper finally withdrew the CUP application, hoping tobegin construction; however, the neighbors thenchallenged the project’s environmental review. The zerointerest, flexible term Tri-State funds enabled the developerto maintain site control during this entire process and eventually finish the project (Figure 10).

Since the Tri-State Fund exclusively loans to farmworker housing development projects, everyone of its loans has gone to borrower groups whose beneficiaries are all low-income,racial/ethnic minorities (typically Hispanic). Almost exactly 50 percent of the tenants at thecomplexes are women, with virtually no female-headed households. Table 24 lists the numberof farmworker housing units that had been completed and that were in development as of1998.

16 ORFH-funded units completed include a day care center at the Linda Vista complex in Toppenish,Wash. ORFH-funded units in development include a community building at the Redwood Plaza site in Pasco,Wash. The Idaho Migrant Council serves as its own project developer. Information was not available aboutthe amount of Tri-State funds used in IMC’s projects.


Figure 11. Mariposa Park, Yakima, Wash.

Table 24. Tri-State Borrower Development Output (1991 to 1998)16

UnitsCompleted

Tri-State FundsRevolved Back

Units inDevelopment

Tri-StateFunds in Use

ORFH Borrower Groups 119 $372,318 195 $298,965

CASA Borrower Groups 266 $480,431 139 $65,920

IMC 72 NA 30 NA

Sources: Tri-State 1998, 9-11; interview, executive director, ORFH.

Not only do Tri-State funded development projects reach a minority population that is amongthe most poorly housed in the nation,they also create living environments thatare child-friendly, enabling farmworkersto travel with their families. Forexample, the ORFH-funded Linda Vistahousing complex includes a day-carecenter, and all other complexes (likeMariposa Park, Figure 11, and AbbeyHeights, Figure 12) include safeplayground areas. Farmworker familyamenities such as these are highlyunusual in an industry where housingarrangements have historically beenlimited to “bullpen” or “horse-stall”dormitories for unaccompanied men(Bell 1997).


The Tri-State Fund’s structure has proven remarkably easy for borrower groups to use. Thereare no application fees for the fund and the application forms are very simple and direct. ORFH, CASA, and IMC created a collaborative underwriting process whereby the partneringgroups review, underwrite, and approve each loan application. If there are any questionsconcerning an application, the underwriters simply ask the applicants directly for clarificationor additional documentation. The staff of ORFH, CASA, and IMC involved in the underwritingprocess remained generalists throughout the life of the Tri-State Fund. No specialized staffpositions have ever been created for underwriting, closing, or servicing.


Figure 12. Abbey Heights, Ore.

The policies and procedures established for the fundserve several functions:

- identification of allowable uses that couldreasonably be expected to be reimbursed bypermanent financing;

- risk assessment by analyzing potentialobstacles and the project’s progress towardpermanent financing approval; and

- provision of flexible, quick responses to anydevelopment obstacles throughconsultations among the founding partners(Tri-State 1998, 1).

Project risks are also assessed by judging whethereach applicant has secured site control, whether the group conducted a market study or needsassessment, and how the proposed permanent funders have reviewed the project. After theloan is approved, the project is carefully monitored. “Before funds are drawn down, there is alot of investigation to confirm project feasibility, and this continues with each subsequentdrawdown on the project” (interview, executive director, CASA).

The terms of its loans also gave the Tri-State fund a highly unusual risk profile (Table 25).

Table 25. Loan Delinquency and Default Trends (FY 1996 to FY 2000):Tri-State Fund

YearLoss

ReservesDelinquencie

s DefaultsPrincipal

Outstanding

FY 2000 $0 $0 $0 $406,340

FY 1999 $0 $0 $0 $343,428

FY 1998 $0 $0 $0 $343,428

FY 1997 $0 $0 $0 $305,000

FY 1996 $0 $0 $0 $320,000


While many Tri-State projects were delayed for long periods during the predevelopment stage,the fund had taken this risk into account by structuring its loans without pre-set terms. Consequently, there were never any delinquent payments or defaults, because there were neverany deadlines for payment in the first place (other than upon receipt of permanent financing). If a project experiences significant delays, the Tri-State partners meet and work out a solutioncollaboratively. The risk that a borrower might not receive permanent financing is coveredthrough a lien on the project by the Tri-State partner making the loan. According to theexecutive director of CASA, these provisions have had to be used in only a few circumstances.


With troubled or derailed projects, loans are paid out from the sale of the property, andany excess [has] to be covered by the [Tri-State] partner that got the loan. CASA hadtwo projects where the property sale didn’t cover their costs, so they put money fromtheir own operating funds into the Tri-State Fund to “make it whole.”

In addition to the risk of project nonperformance, the Tri-State Fund has also dealt with therisk of partner nonperformance. One of the partners, the Idaho Migrant Council, successfullyconstructed three developments of 24 units each in DuBois, Blackfoot, and Heyburn, Idaho. After these initial victories, however, the organization experienced heavy staff and managerialturnover, and subsequently had to scale back its development objectives to “[maintain] thesame level of quality rental management services to our existing housing projects” (Tri-State1998, 8). Even though the IMC has not requested any additional loans from the Tri-State Fund,the fiscal agent for the fund has invested all of IMC’s idle funds, providing a substantialamount of interest income while maintaining the fund’s liquidity.

Sustainability

Another benefit of IMC’s idle funds is that the investment income earned has funded a portionof the loan fund’s administrative costs, as well as supporting the cost of the Tri-State partners’annual retreat. As a result, the Tri-State Fund has been 100 percent self-supporting since1995, without having to seek any outside grants or investments for administrative expenses.

The annual retreat is an important element of the Fund, because it is an opportunity for theTri-State partners, their fiscal agent, and invited rural and farmworker affordable housingpractitioners to gather and work out solutions to ongoing development problems encounteredby borrower groups. In addition, many innovative approaches to development have beengenerated during the retreat, including the use of LIHTC for farmworker housing development.

CASA was the first organization in the country to [develop farmworker housing] usinga state-funded housing tax credit, and their experience with this credit has served as amodel for other states looking to adopt a state tax credit. CASA is also working to beone of the first groups in the nation to use Low Income Housing Tax Credits inconjunction with the USDA Rural Development 514/516 program. (Interview,executive director, CASA)

Because the Tri-State Fund has not needed to seek outside investments to build its capital, ithas also maintained 100 percent fund equity (Table 26).


Table 26. Fund Balance Trends (FY 1996 to FY 2000): Tri-State Fund


FY 2000 $545,200 $545,200 100%

FY 1999 $538,000 $538,000 100%

FY 1998 $532,380 $532,380 100%

FY 1997 $528,000 $528,000 100%

FY 1996 $512,000 $512,000 100%



Although the Tri-State Loan Fund has been in existence for ten years, it may be on the brink ofdissolution. Ironically, its success may be the reason for its possible breakup.

In 1999, CASA of Oregon began the application process for a CDFI grant and certification. According to CASA’s executive director, “We initially saw CDFI as funding to support theorganization’s homeownership initiatives as a source of long-term financing.” CASA’s recordwith the Tri-State Fund was a key element in its winning CDFI certification and grant moneyin 2000. The CDFI examiners looked at (among other things) the number of units producedthrough the Tri-State Fund and how well the Tri-State partners were able to cycle moneythrough the fund (“ten times over!” exclaimed CASA’s executive director). During theapplication process, CASA also expanded its vision of the potential uses for the CDFI grant toinclude property purchases rather than the funding of property options.

Although CASA’s CDFI will have a regional service area that includes Washington state, it willbe administered solely by CASA. ORFH’s executive director commented on the impact ofCASA’s decision.

CASA’s decision to use its Tri-State share for its CDFI may signal the dissolution of theTri-State Fund. [However], this might not necessarily be a bad thing, in that all thepartners have matured in their own ways – i.e., the fund may have served its purpose.

While the transition to CDFI status was fairly easy for CASA, receiving the actual funds hasproven difficult. Although the organization was approved for CDFI funding in 2000, CASA hadnot received any funds as of September 2001. CASA’s executive director noted thatcontingency planning is critical for any organization thinking of becoming a CDFI.

Being a neophyte with the CDFI process, it’s essential to secure your first year’soperating funds for the CDFI to accommodate these kinds of delays, and even moreimportantly so that the staff can set up strong financial and monitoring systems, loanevaluation procedures, and internal controls in the interim. (Interview, executivedirector, CASA)


When asked what advice he would give to practitioners contemplating starting a loan fundsimilar to the Tri-State Fund, the executive director of CASA emphasized solid underwritingcriteria and a sharp mission focus. One of the key considerations for a Tri-State-type fund isensuring that the project costs being funded by the predevelopment loans will be eligible for thetype of permanent financing proposed by the project sponsor (which can be verified by thepermanent financing source). Another underwriting practice that Tri-State developed wasrequiring each partner in the fund to secure a lien on their borrower groups’ property forwhich they had received a predevelopment loan. This practice ensured that the fund wouldhave collateral in case of permanent default.

The executive director of CASA also stated that Tri-State’s specific mission focus –predevelopment funds for farmworker housing – was a key part of its success. He maintained,“It’s very important not to stray too far from the primary purposes of your fund, or it canbecome over-committed and/or tied up in nonperforming projects.” He added that the fund’smission and activities should reinforce the core missions of its partner organizations, because“the transformation from developer to lender can be a pretty serious step.”

The executive director of ORFH emphasized the centrality of trust among the foundingpartners in a Tri-State-type fund. “The groups have to have some base level of trust orwillingness to jump off the deep end with the other organizations.” When asked howdisagreements had been resolved between Fund partners, ORFH’s executive director initiallyjoked, “by bare knuckles – no Marquess of Queensberry stuff.” He added, though, that thereality of the Tri-State partnership was one of close working relationships where the partnergroups have not been hesitant to challenge each others’ proposals and assumptions. Once thatlevel of trust is cultivated, it is possible to have the benefits of both autonomy and risk-sharing. “You have control of your own funds, but with valuable peer support and review” (interview,executive director, ORFH).


CONCLUSION AND BEST PRACTICES

In his forward to the National Community Capital Association’s Best Practices for CDFIs, NCCAExecutive Director Mark Pinsky asserts that the main function of best practices is related toinstitutional change.

To be effective, CDFIs must be strong and adaptable institutions. CDFIs need to knowwhat works and what does not work in the communities they serve. Change requiresinstitutional courage. (Lehr 1998, v)

While not all of the revolving loan funds profiled in this study are certified CDFIs, the sameprincipal holds true in evaluating their structures and investment outcomes. In order for ruralrevolving loan funds to help alleviate the housing problems within their service areas, theymust be resilient in the face of change and effective within their missions.

However, Pinsky also points out that “what works for one CDFI may not work for another”(Lehr 1998, v). Consequently, while it is possible to derive some commonalities from the fourcase studies presented here, the outcomes of each loan fund’s practices are highly context-specific. Best practices, in the final analysis, are tools to help community lending institutionscarefully monitor both the external political, economic, and social context within which theywork, as well as the changing internal nature of the organization itself. When external andinternal change is observed over time, appropriate changes in lending policy and proceduresare formulated by the institution.

With these considerations in mind, a brief summary follows of the characteristics, strengths,and challenges for each of the four loan funds studied.

Kentucky Mountain Housing Development Corporation:The Little Fund That Could

Even though its loan fund was capitalized seven years after the corporation itself was foundedin 1973, KMHDC’s New Home Loan program and Home Repair program are among thelongest-lived of the four revolving loan funds studied. This loan fund has distinguished itselfnot only through its longevity, but also through its creation of a permanent mortgage lendingproduct that has resulted in nearly 1,000 houses built or rehabilitated in two extremely poorcounties.

The strengths of the fund lie in its simplicity and its attunement to the culture of its servicearea. In order to make homeownership possible for residents with incomes of $10,000 or less,KMHDC pared down its housing design to a basic “warm and dry house” and adjusted itsinterest rates according to the monthly payment a borrower could afford at 20 percent of his orher income. In order to keep its services accessible to its rural residents, KMHDC has one officein each of its service area counties, accepts mortgage payments in cash, and walks borrowersthrough the application process – in person, step by step. Because KMHDC does its ownhousing construction, it is able not only to gear its designs toward affordability but also to be areliable area employer.


The challenges for the fund will be adjusting to the changing nature of the communitydevelopment lending industry without losing its simplicity and its commitment to serving low-income residents. Because grant money for operating funds is increasingly scarce, andbecause federal housing programs have become increasingly fragmented into several different“pots,” community development lenders are increasingly pressured to become more self-sustaining – while simultaneously developing enough internal capacity to handle complexreporting requirements. The most common method for dealing with these pressures is toincrease service charges and interest rates for lending products and to centralize and automateloan processing, underwriting, and servicing. As KMHDC’s executive director pointed out,these are changes that would pull its lending services out of reach for many of their existingclients.

Consequently, a KMHDC-type fund would be most appropriate for a remote rural area withpersistent poverty and high unemployment – but with low construction and administrativecosts. The higher the cost of materials and the more complex the lending environmentbecomes, the more likely it is that this type of fund will have to either diversify its products orchange its lending focus to higher income borrowers.

Federation of Appalachian Housing Enterprises: Strength Through Cooperation

Within rural housing development circles FAHE’s Construction Loan Fund and Home LoanFund are likely the best known of the four case studies. As of 1998, the Construction LoanFund has made possible the construction of 1,851 new homes, the rehabilitation of 4,086existing homes, and the repair and weatherization of 22,473 homes within its four-state servicearea. From 1985 to 1998, the Home Loan Fund lent a total of over $16 million for 459permanent mortgages. The combined total assets of the Federation and its member groups in2000 were a staggering $161 million. FAHE has also used its lending reputation to enhance itsclout as a national housing policy advocate: “We decide what conversations need to take placeon a state and national level, and then we go and make sure that they happen” (interview,executive director, FAHE).

FAHE’s key strength lies in its structure as a cooperative, member-controlled enterprise. Because its membership is comprised of a wide range of local nonprofit housing developers,FAHE’s impact is far larger than that of a single community development lending institution. The money that goes into its Construction Loan Fund builds the experience and capacity of itsmember groups as housing developers, who can claim their “piece” of the loan fund as part oftheir assets. These groups, in turn, expand the influence of FAHE as a regional housingadvocate and its reputation as a lender, making it easier for FAHE to fundraise on their behalf. Not only does FAHE have a cooperative relationship with its member groups, it is enhancing itscooperative relationship with its parent organization (HEAD) and its sister institution, theCentral Appalachian People’s Federal Credit Union (CAPFCU). By encouraging its membergroups to market CAPFCU membership to their clients, FAHE will have another tool to promoteasset accumulation and economic stabilization in poor Appalachian communities.


FAHE is beginning to work through the challenge of reassessing its role as a permanentmortgage lender. The cooperative model begins to fray when competition enters the picture. Likewise, the Home Loan Fund is unable to operate as efficiently or have as much impact asthe Construction Loan Fund, because it is operated in competition with FAHE member groups’local revolving loan funds. Not only does the HLF have the challenge of making permanentmortgages affordable to families with $10,000 to $14,000 incomes, it has to market its lendingproduct over a four-state region – often through its member groups who have competingmortgage products. When member groups have the choice of originating their own mortgagesor referring a borrower to FAHE, they will typically choose the former. FAHE is beginning tomeet this challenge by lending to organizations who are not member groups, but who needpermanent financing for small, highly specific projects. The challenge at that point will bemarketing this kind of a “niche” product outside the sphere of influence of its member groups,which will involve time and labor-intensive deal-making – in addition to servicing its alreadyexisting permanent mortgage portfolio. However, because FAHE has completed an upgrade ofits information technology systems, the organization may well be in a position to launch suchan initiative.

Another critical factor in FAHE’s evolution has been the presence of two state governments(Kentucky and Virginia) that were willing to capitalize permanent mortgage funds for theirstates and to allocate HOME dollars to that fund. In West Virginia, a foundation (theBenedum Foundation) provided the necessary initial capital. The FAHE model also depends onthe existence of a network of experienced housing development practitioners and groups. Inthe case of FAHE, this network was the result of many decades of evolution and struggle, bothindividually and collectively.

Cooperative financial complexes have historically thrived in areas where there is a commonculture and a common threat (in Mondragon, Spain under the dictator Franco and in NovaScotia, Canada during the Depression). In FAHE’s four-state service area, the common cultureis the resilient mountain folk culture of Appalachia, and the common threat is persistentpoverty. Consequently, a FAHE-type cooperative lending model would be most likely to takeroot in a region where there is a high degree of social commonality and a similar set ofeconomic challenges. As a model, FAHE is not easily replicable in any context; however, theexample of its history and the long labor of its member groups and staff can serve todemonstrate the importance of solidarity and commitment to groups who would want tofollow its example.

Vermont Community Loan Fund: Lending Like Clockwork

The Vermont Community Loan Fund, incorporated in 1987, was the only case study loan fundthat was an attempt to directly replicate an existing model (in this case, the New HampshireCommunity Loan Fund). Because it began its life as a loan fund, VCLF has not had to shift itscorporate identity and activities significantly over its existence. Also, because it is a state fund,it has to deal with the regulatory and fiscal constraints of only one state – rather than fourdifferent states. As a result, VCLF’s lending activities – particularly in its Housing andCommunity Facilities portfolio – work like a well-oiled machine. It has a cadre of 13 highly


experienced community land trusts, and its delinquency and default record is very low (withonly one housing loan default in 14 years of operation). If a borrower group goes even tendays past due on a loan payment, they promptly receive a phone call from loan fund staff. VCLF’s level of self-sufficiency is also unusually high among the four case studies; it is theproduct of deliberate self-assessment (with the assistance of NCCA) and careful monitoring of income and expenses. Consequently, VCLF’s major strength lies in its careful planning andoperational efficiency.

Major challenges for VCLF lie along two fronts. The first challenge is the constant necessity forVCLF (like FAHE) to explore new niche lending products and aggressively market them inorder to compete effectively with the products of the state-funded Vermont Housing andConservation Board. However, these new initiatives will also entail new sets of risks, as well asdifferent lending criteria and monitoring practices. One example is the rental rehabilitationloan pilot targeting private landlords in the Northeast Kingdom. Not only does the pilot offer anew lending product (a 30-year, fixed-rate mortgage through the USDA IntermediaryRelending Program), but VCLF is offering it to a completely new market of borrowers outsideits customary group of community development land trusts.

The second challenge for VCLF could be termed “institutional overreach.” While the projectsVCLF funds are getting larger (and the affordability crisis in the state continues unabated),eventually there may not be enough loanable funds for it to accomplish its goals. While itsstatus as a CDFI (and a founding member of NCCA) gives VCLF a tremendous edge in courtinginvestments, large investment “chunks” at a low cost of funds are difficult to find – particularlyfor a loan fund that does not receive any significant state budget allocations.

A VCLF-type loan fund would work well in a rural environment where there are lower overallpoverty levels, but much greater housing affordability problems. Because VCLF is located in ahigh-growth state, it can take calculated risks such as establishing a loan fund for smallbusinesses, and use the higher earnings to subsidize its Housing and Community Facilitiesportfolio. Likewise, the state’s ever-rising property values should keep the HCF portfolio on astable, robust growth path, enabling it to serve as the fund’s “anchor.”

The Northwest Farmworker Housing (Tri-State) Loan Fund: The Stealth Fund

The Tri-State Fund is at once the most anomalous and most ingenious of the four case studies. It violates virtually every “rule” governing best practices in community development lending: ithas no loan loss reserves, no capital growth strategy, no set terms for its loans, and no fee-for-service income (such as application fees). However, it is precisely this unorthodoxy that hasenabled it to succeed in an area of community lending that is extremely difficult under the bestof circumstances: migrant farmworker housing. Its flexibility of terms and zero-interestpredevelopment loans have enabled its borrower groups to retain development site optionsthrough regulatory obstacles and community opposition that would derail virtually any otherproject. Consequently, it has succeeded in quietly laying the groundwork for a three-statenetwork of farmworker housing organizations to build and maintain 457 units of farmworker


housing, with 364 additional units in the development pipeline. It has also provided at leastone of its founding organizations, CASA, the lending experience to attain CDFI status.

The context of farmworker housing development renders moot virtually every argumentagainst a Tri-State-type fund.

- The absence of a capital growth strategy for the fund was a conscious decision to usethe staff time and resources that it would have taken to court investments (in a highlycompetitive environment) to focus on making difficult development deals work. Theinitial capitalization grant was more than sufficient for the founding partners (ORFH,CASA, and IMC), and the presence of Tri-State as the “first-in” lender resulted in theleveraging of countless additional dollars into individual projects.

- The Tri-State partners’ collaborative management and underwriting practiceseliminated the need to create and fund a separate loan fund staff. ORFH, CASA, andIMC staff processed, underwrote, and serviced the loans, while the Northwest RegionalFacilitators served as the fund’s fiscal agent. This collaborative arrangement also builtthe capacity of the three organizations through the sharing of insights and bestpractices.

- The absence of a loan loss reserve posed no risk to Tri-State, because it had no fixedterms for its loans other than payment upon receipt of take-out financing. The risk of aborrower failing to secure take-out funding was covered by a lien on the property bythe sponsoring partner agency (ORFH, CASA, or IMC) and a pledge by that agency topay any costs not covered by sale of the property.

- The risk of non-performance by any of the partnering agencies was covered byinvestment of that agency’s idle funds by the fiscal agent. In addition, the use ofinterest from those investments covered a portion of the fund’s operational expenses, aswell as an annual retreat.

- Finally, while the Tri-State Fund may not ultimately be as long-lived as the other loanfunds studied (as CASA’s exit has demonstrated), the fund has served as the launch padfor a comprehensive regional farmworker housing development effort and garneredpolitical support and visibility for farmworker housing as an issue.

As a result, a Tri-State-type fund may be ideal for “hard-to-reach” rural regions andpopulations, such as the colonias and the Native American trust lands, where orthodox lendingpractices are not always feasible.

Best Practices for Rural Revolving Loan Funds

- Founding a Loan Fund

First, examine carefully what loan funds are already in existence within the service area thatthe new loan fund would cover, in order to avoid duplicating services. When structuring the


loan fund’s mission, focus on one specific aspect of the housing development needs in the area,rather than attempting to do everything. Secure technical assistance either from alreadyexisting loan funds with a similar structure or from national community lending tradeassociations (such as the National Community Capital Association). Look to the faithcommunity in the new loan fund’s service area for initial capitalization (churches played acritical role in the capitalization of three out of the four case study loan funds).

- Planning for Change to Meet Potential Challenges

When structuring policies and procedures for a new loan fund, the advice of the executivedirector of KMHDC is particularly salient: “I like to operate by the KISS principle: Keep ItSimple, Stupid.” The more simple the loan fund’s policies and procedures are, the more usablethey will be by its borrower groups or individuals. When facing competition from the loanproducts of other community lending organizations, the most successful loan funds diversifytheir lending products, targeting new borrowers that are outside their traditional market – butstill within their mission area. Successful funds also tend to seek out technical assistance andpeer review after several years of operation, with the National Community Capital Associationserving as a key provider. - Risk Management through Underwriting and Portfolio Monitoring Practices

For predevelopment and gap financing loans, a key practice in underwriting is obtaining proofthat the borrower will be able to secure permanent take-out financing for the project. Bewareof trends in federal mortgage programs – sudden changes in congressional budget allocationscan leave projects stranded in the predevelopment phase. For permanent mortgage products,solid pre- and post-purchase homebuyer education and counseling is paramount. Borrowersshould be able to formulate a budget with counselors that will enable them to make theirmortgage payments and demonstrate an ability to stay within that budget. In-housecounseling for individuals by the lending institution will make delinquency monitoring mucheasier, due to familiarity with the borrowers. For both predevelopment and permanentmortgage products, adequate collateral must be secured.

For all loan products, successful loan funds monitor delinquencies closely, intervening as earlyas possible. The more delinquent a loan, the lower the chance that the borrower (whether anindividual or group) will come in to work out a repayment plan. In the event of foreclosure,the value of the collateral must be able to cover the cost of the defaulted loan. However, a loanfund’s familiarity with its borrowers and borrower groups is a key factor in preventingdelinquencies in the first place.

- Ensuring Sustainability through Investment in Capacity

For many rural revolving loan funds, the issue of self-generating operating funds isparticularly difficult. There is an inherent tension between fulfilling a low-income housingdevelopment mission and increasing fees and interest rates to support operations withoutrelying on outside grants. Whether a loan fund leans toward self-sustainability oraffordability, the decision is best made with as much information as possible. An informal poll


of similar loan funds may reveal ways that additional income can be generated withoutsacrificing loan product affordability. For example, both FAHE and VCLF found that theycould charge more for their predevelopment loan products, because their borrower groupsvalue the ease of access to the loan fund more than low interest rates. As a result, higherinterest rates on these loans can be used to subsidize operating expenses.

Fund sustainability can also be improved through investments in new, better integratedinformation technology systems. A software program that enables a loan fund to link itsaccounting spreadsheets to its loan application database will save time and enable staff tomore easily generate different kinds of reports for different investors. Organizational capacitycan also be improved by investing in training for existing staff and hiring new paraprofessionalstaff to support them.

Several loan funds have benefitted from capacity building grant programs, such as the HUDRural Housing and Economic Development program and the U.S. Treasury Department CDFIprogram. Two out of the four case study loan funds applied for and obtained CDFIcertification and grants (FAHE and VCLF), as did CASA of Oregon, a former partner in the Tri-State Fund. The CDFI application and grant administration process, however, is not for thefaint of heart. All three CDFIs studied in this report emphasized that any loan fund thinkingabout CDFI certification needs to make sure that it has sufficient staff and informationtechnology to fulfill substantial planning and grant reporting requirements (which oftenchange from year to year). CASA’s executive director noted that CDFI applicants should alsomake sure that they have sufficient operating funds on hand for their CDFI’s first year ofoperation (CASA was approved as a CDFI in 2000, but still had not received funding as ofSeptember 2001).

In the final analysis, a successful community development loan fund is made up of committed,competent staff and successful borrowers. People matter. The longer an individual stays witha loan fund, the more experience he or she will have in lending and in navigating thechallenges specific to the fund’s service area. Long-time staff members can cultivate strongworking relationships with borrowers, as well as the trust and commitment necessary to workwith partnering organizations. The executive director of FAHE commented, “When you lose astaff member, you lose years of capacity and you can’t instantly build that up again. . . . Youcan’t create experience and capacity overnight, even if the money is there.”

He then added, “Of course, the upside to that [fact] is that you can’t kill [capacity] overnighteither. We’re an institution. We’re going to be around for a long time.”


REFERENCES

Bell, Brian. 1997. Field Tested: Seeking Housing Solutions for Farmworkers. Rochester, N.Y.:Brian Bell.

Fabiani, Donna and Lehn Benjamin. 2001. “FY 1999 Annual Survey Preliminary Findings,Core Component.” CDFI Fund Quarterly. 4 (2): 1-5.

George, Lance. 2000. “The Mobile Home in Appalachian Eastern Kentucky: Causes andConsequences.” Paper for presentation at the Western Social Sciences AssociationAnnual Meeting. San Diego, Calif., April 26-30, 2000.

Gillette, Vicki. 1994. Self-Assessment Tools for CDFIs. Operations Guide for CDFIs. Philadelphia, Pa.: National Community Capital Association.

Haack, Shelly. 2000. History of a Loan Fund: Investment Pays Big Dividends for RuralCommunities. Pacific Mountain Review. 18 (3): 1-8.

Housing Assistance Council (HAC). 2001. No Refuge from the Fields: Findings from a Survey ofFarmworker Housing Conditions in the United States. Washington, D.C.: HAC.

______. 1999. “Housing and Economic Conditions in Appalachia’s Distressed Counties:Recommendations for HUD Rural Housing and Economic Development FundingPreference.” Policy Paper prepared November 10, 1999. Washington, D.C.: HAC.

______. 1998. The Use of HOME in Rural Areas. Washington, D.C.: HAC.

______. 1997. Housing for Families and Unaccompanied Migrant Farmworkers. Washington,D.C.: HAC.

______. 1994. State Data Sheets: An Overview of Housing and Poverty Data from the 1990Census. Washington, D.C.: HAC.

Lehr, Margaret. 1998. Best Practices for CDFIs: Key Principles for Performance. Philadelphia,Pa.: National Community Capital Association.

Lipson, Beth. 2000. CDFIs Side by Side: A Comparative Guide. Philadelphia, Pa.: NationalCommunity Capital Association.

Moy, Kirsten and Alan Okagaki. 2001. “Changing Capital Makets and their Implications forCommunity Development Finance.” A Capital Xchange journal article prepared for theBrookings Institution and the Harvard University Joint Center for Housing Studies. July 2001: 1-18.


National Low Income Housing Coalition (NLIHC). 2000. Out of Reach 2000. Washington,D.C.: NLIHC.

Stein, Eric. 2001. “Quantifying the Economic Cost of Predatory Lending.” Report prepared forthe Coalition for Responsible Lending. Durham, N.C.: CRL. Available on the WorldWide Web: <http://www.responsiblelending.org.>

U.S. Department of Agriculture. Economic Research Service (USDA ERS). 1997. Credit inRural America. Agricultural Economic Report No. 749. Washington, D.C.: USDA.

U.S. Department of Labor. Office of Program Economics. 1994. Migrant Farmworkers:Pursuing Security in an Unstable Labor Market. (Based on findings from the NationalAgricultural Workers Survey (NAWS), Research Report No. 5.) Washington, D.C.: U.S.Department of Labor.

Vermont Statutes Annotated. Published by Lexis Nexis. Available on the World Wide Web:<http://198.187.128.12/vermont/lpext.dll?f=templates&fn=main-h.htm&2.0>.


APPENDIX A. RURAL REVOLVING LOAN FUND SURVEY INSTRUMENT

Organization Name:___________________________________________

SURVEY: BEST PRACTICES IN REVOLVING LOAN FUNDS

1. Loan Fund History

Year loan fund was started: _________

Original sources of capitalization:

Source Amount Grant or Loan?

2. Staff Structure and Current Activities

Position Title # Full-Time Staff # Part-Time Staff # Volunteers


At the time the loan fund was incorporated, it offered:

Loan Product Name Loan Product Description (including rates and terms)

The loan fund offers:

Loan Product Name Loan Product Description (including rates and terms)


Please indicate, using the table below, the number and percentage of borrowers from the followingdemographic groups for each of your loan products.

Loan Fund Products (current FY)

Minority Borrowers/Beneficiaries

Female Borrowers/Beneficiaries

Low-Income Borrowers/Beneficiaries

# % of total # % of total # % of total

% % %

% % %

% % %

% % %

% % %

3. Social and Financial Performance Indicators

What measures of financial performance (such as fund growth, default rates, etc.) does the loanfund track?

1. ________________________________________

2. ________________________________________

3. ________________________________________

4. ________________________________________

5. ________________________________________

What indicators of social performance (such as increases in borrower income, neighborhoodstability, etc.) does the loan fund track?

1. ________________________________________

2. ________________________________________

3. ________________________________________

4. ________________________________________

5. ________________________________________


Please attach any annual reports or other compiled information that indicate how your loan fundhas performed on each of these measures up to the last five years.

4. Financial Risk Management

Please complete the following table regarding loan fund risk management activities.

Year Loss Reserves Delinquencies Defaults Loan Principal Outstanding

FY 2000 $ $ $ $

FY 1999 $ $ $ $

FY 1998 $ $ $ $

FY 1997 $ $ $ $

FY 1996 $ $ $ $

What criteria does the loan fund use to measure borrower risk?

1. ________________________________________

2. ________________________________________

3. ________________________________________

4. ________________________________________

5. ________________________________________

Based on your criteria, estimate the percentage of the loan fund’s current portfolio that falls intothe following risk categories.

High Medium Low

% % %

Based on your criteria, estimate the percentage of the loan fund’s current portfolio that falls intothe following investment return categories.

High Medium Low

% % %

17 Defined as growth in new investments, rather than cumulative growth.

18 Defined as revenue that is not dependent on outside sources, such as fee-for-service revenue, etc.


5. Fund Capitalization

Year Annual CapitalGrowth17

Average # ofNew

Investors

Average NewInvestment Size

Avg.Rate

Avg.Term

(years)$ %

FY 2000 $ % $ %

FY 1999 $ % $ %

FY 1998 $ % $ %

FY 1997 $ % $ %

FY 1996 $ % $ %

6. Fund Sustainability

Year Percentage of Operating Budget Coming From ...

Self-Generated Funds18 Grants Investments Other

FY 2000 % % % %

FY 1999 % % % %

FY 1998 % % % %

FY 1997 % % % %

FY 1996 % % % %

Year Fund Equity Total Capital

FY 2000 $ $

FY 1999 $ $

FY 1998 $ $

FY 1997 $ $

FY 1996 $ $


APPENDIX B. INTEREST CREDIT CONTRACT CHART, KMHDC

ALLOWABLE INTEREST CREDIT

Each borrower may enter into an interest credit contract, which will charge a part of theirinterest. This unpaid interest will become a credit which the borrower still owes on themortgage. The amount of allowable interest credit shall be based on total household income.

AdjustedIncome

InterestCredit

InterestPaid

Amortization Rate per $1,000 Loaned

$8,999 7 percent 1 percent 4.60








ADJUSTED INCOME = Gross Household Income Less:

S 7.65 percent of income subject to Social SecurityS $480 per dependent preschool or student in householdS 11 cents per mile for those driving more than 30 miles round tripS Cost of child care; actual amount to be paidS Deduct all medical expenses over 3 percent gross income for elderly,

handicapped or disabled households [sic].S $400 per each elderly family [sic], 62 or olderS Exclude income for household members that are completely incapacitated

(Reprinted from KMHDC document)

This report provides case study analyses of four different housing-related rural revolving loan funds in order to examine what bestpractices apply in different rural contexts. Some best practices arecommon to all the funds studied, and others vary considerably. Thereport details these variations and provides specific advice for rural-serving organizations seeking to establish revolving loan funds.

ISBN 1-58064-127-X

Documents

BEST PRACTICES IN REVOLVING LOAN FUNDS FOR RURAL ... · BEST PRACTICES IN REVOLVING LOAN FUNDS FOR RURAL AFFORDABLE HOUSING. $5.00 April 2003 Housing Assistance Council 1025 Vermont